ARCHITECTURAL COMMITTEE OVERRULED

ARCHITECTURAL COMMITTEE OVERRULED

QUESTION: Can the board of directors overrule an architectural committee's approval of a homeowner's application?

ANSWER: Depending on how the committee is structured by your governing documents, an architectural committee either (i) makes recommendations to the board or (ii) has direct authority to approve or disapprove applications. In either case, the board has final say in architectural matters.

Board Options. In the first instance, the architectural control committee (ARC) makes recommendations to the board, which directors can accept or reject. The board makes the final decision. If the governing documents give the architectural committee independent decisionmaking authority, the board still retains control via four avenues.

1. Reconsideration. The first is when the ARC disapproves an application, the applicant can appeal to the board for a reversal of the committee's decision. By statute, the board is given authority to reconsider and reverse ARC disapprovals.
2. Override ARC Decision. Where a committee's decision is contrary to the CC&Rs (such as approving a structure in the setbacks), the courts have made it clear that CC&Rs control. Thus, boards can override an ARC approval so as to comply with the association's governing documents. 

3. Replace Committee Members. Nearly all documents provide that ARC members are appointed by the board. If the ARC refuses to reverse a decision, the board can remove committee members and replace them with members in line with the board's wishes. (If committee members are elected by the membership, the board cannot remove them and will need court intervention.)

4. Seek Court Order. If the ARC cannot be removed by the board, it has the option of going into court for an order reversing the ARC's decision.If, however, the disagreement between the board and the ARC is one of aesthetics rather than violation of the CC&Rs, the court will likely side with the ARC.

RECOMMENDATION: Make sure your association has clear architectural standards with application requirements, notice and review periods, rejection guidelines and, if appropriate, a reconsideration procedure. Where an architectural committee goes off the rails and makes decisions contrary to the governing documents, the board should immediately seek legal counsel.

RECALL QUORUM

RECALL QUORUM

QUESTION: The battle goes on in our community… the second recall election in six months! If they can't make quorum, the petitioners believe they can adjourn the meeting to a new date with a lower quorum. I thought a recall died if it failed to meet quorum.

ANSWER: It depends on your bylaws. As you already know, special membership meetings are ridiculously easy to call. Only 5% of the membership need to sign a petition to trigger a recall meeting. That means quorum is the key issue.

Bylaws. Following is a typical bylaw provision: 

In the absence of a quorum at a Members' meeting, a majority of those present in person or by proxy may adjourn the meeting to another time... The quorum for such a meeting shall be at least twenty-five percent (25%) of the total voting power of the Association, present in person or by proxy.

No Exception. The provision makes no exception for recall meetings. Since recall meetings are membership meetings, a majority of those present can adjourn to a later date where the quorum drops to 25%. The unintended consequence is that a small number of members can recall an entire board. If only 25 of 100 members cast ballots, the recall meets the reduced quorum. Of the 25, only a majority, i.e., 13, are needed to approve the recall. 

I find it troubling that in a 100-unit association, five members can trigger a special meeting and 13 members can recall an entire board. This scenario lends itself to a great deal of abuse as described in my October 26 newsletter. However, a careful reading of the bylaws with the Davis-Stirling Act provides some balance.

Majority of Those Present. The bylaws state that "a majority of those present...may adjourn the meeting" and the Davis-Stirling Act provides that:

each ballot...shall be treated as a member present at a meeting for purposes of establishing a quorum. (Civ. Code §5115(b).)

That means ballots count as members in the room. If 30 ballots were cast and only ten members physically attend the meeting and all ten vote for adjournment, ten is not a majority of forty. Therefore, the motion fails and the recall dies.

RECOMMENDATION: Rather than go through mental gymnastics, associations should amend their bylaws. I recommend eliminating cumulative voting, proxy voting, and quorum requirements for the election of directors (which eliminates the need for reduced quorums). All other meetings (including recalls) require a majority quorum.
Easy-Peasy. With those amendments, elections are easy. There are no reduced quorums and no cumulative voting calculations to create confusion. It's a straightforward, two-step process. Did the petitioners make quorum? If not, the recall dies--there are no reduced quorum meetings. If they made quorum, did a majority approve the recall? It's a straight up or down vote to remove a director or an entire board. No further calculations are needed.

PANTY THIEF

PANTY THIEF

QUESTION: There is a man living in our complex who appears to have Down's syndrome. He goes to the laundry facilities and steals women’s underwear and bras. He has even tugged on a girl’s underwear as she was bending over. The board is afraid of lawsuits and refuses to send the owner a letter. If anyone complains, they say "go to the police." What can we do?
ANSWER: I passed this hot potato to attorney Jasmine Fisher. Following is her response:

Disability Rights. Your board may be unduly concerned about disability rights. Fortunately, the law only requires "reasonable" accommodation of disabilities. There is no law or case on record (yet!) that gives a disabled person the right to steal undergarments. That means your panty thief may create liability for your association if the board refuses to act.
Association Liability. While the association is normally not responsible for the criminal acts of a third party, Frances T. v. Village Green made an exception when the crime is foreseeable. In Frances T, the board knew about the increased crime in the area, failed to install exterior lighting Frances T. had requested (to make her unit safer) and actively prevented her from installing lighting. She was subsequently raped and robbed in her unit. The court found the association and its directors liable because the harm was foreseeable and they did nothing.
With your panty thief, it is foreseeable the thefts will continue and may escalate into something more physical. If so, your association could be liable for your board's failure to act. Simply saying “Go to the police” will not remove the liability exposure.
Board's Options. The courts provide a wide degree of latitude to board decisions so there is no right or wrong option, aside from doing nothing.The board can use the nuisance provision of your CC&Rs to call a hearing to warn the owner. If the behavior continues, fines can be levied (following another hearing). If that does not work, a letter from legal counsel threatening litigation can be next. Ultimately, a lawsuit may be necessary. If needed, the board can skip the early steps and jump to a lawyer letter and potential litigation.

Notice to Members. Should the members be warned? Notifying owners can be tricky. If you don't notify the membership and your panty thief escalates to sexual assaults, your board could be sued for failing to warn the members. If the board says too much, they could be sued by the panty thief. It's the same problem boards face when a registered sex offender moves into a complex. They can't post a notice that sex offender Dilbert Smith moved into unit 301. They must be more circumspect.

RECOMMENDATION: As JFK said, “There are risks and costs to action. But they are far less than the long range risks of comfortable inaction.” To minimize legal exposure, boards who are aware of criminal activity in the development should coordinate with legal counsel for appropriate (i) action against the perpetrator and (ii) notice to the membership.

DIRECTOR'S DUTY OF LOYALTY

DIRECTOR'S DUTY OF LOYALTY

QUESTION: Does the “duty of loyalty” mean I have to support, in public, a position reached by a majority of the board? Am I precluded from publicly dissenting and making adverse comments?

ANSWER: You can dissent and make adverse comments in a board meeting when the matter is under discussion by the board. But once a decision is made, it's time to move on. You don't have to become a cheerleader for the board's decision but a director goes too far when he undermines the board or the agreed-upon course of action. Such behavior can result in a breach of the director's fiduciary duties.

Business Judgment Rule. When a homeowner is elected to the board, he/she automatically becomes a fiduciary and must follow the business judgment rule. That means the actions of a director must be in good faith, in the best interests of the association, and with prudent care. (Corp. Code §7231(a).) Stating you voted against the motion but support the board's decision is okay. Disrupting operations, attacking fellow directors and undermining an agreed-upon course of action is not okay. It is harmful to the association and falls outside the Business Judgment Rule. When that happens, disruptive directors face personal liability.

Dealing with Rogues. If a director goes rogue, the board may have no choice but to censure him/her and, where appropriate, form an executive committee to exclude the director from sensitive issues. Any director who believes he must win all votes is really not suited to be on the board. If needed, the board can call a membership meeting to remove the director.

RECOMMENDATION: Once the board makes a decision, dissenting directors should either publicly support the decision or keep silent. They should in no way undermine the board. If the director cannot follow this policy, he/she should immediately resign from the board. Once off the board, the former director can publicly oppose the board's decision, provided he/she does not disclose any privileged information.

CHANGING RESERVE SCHEDULES

QUESTION: Our past board had a reserve study done. However, much of the information is inaccurate. As a new board are we bound by the study? Many items are in need of repair or replacement but we feel we may get in trouble if we act outside the reserve study. What should we do?

ANSWER: Facts on the ground, not the reserve study, dictate your maintenance needs. The study is merely a guideline and boards have the authority to take appropriate action when it comes to repairs. Moreover, they have the right to notify the reserve specialist of the changed circumstances so adjustments can be made to the study. If the reserve company refuses to update the study with more accurate information, it's time to change companies.

CONTROLLING MANAGEMENT

CONTROLLING MANAGEMENT

QUESTION: Our management company is trying to take over all board duties. I for one am against that. Can a board member perform certain duties within the association--like talking to vendors and current contractors to get information for possible work that may be planned?

ANSWER: A management company cannot take over an association on its own. It has no legal authority for such action. The company serves as a managing agent of the association and is given direction through the board of directors. As such, it has as little or as much authority as the board gives it. If a management company is out of control, it's the board's fault.  

Director Limitations. The same limitations are true for directors. Board members function within guidelines established by the board. Although directors have a duty of due diligence, they do not have the right to individually start questioning (interrogating as interviewees often see it) employees, contractors, members, and tenants without board approval. Doing so can lead to claims of harassment, interference with contractual relations, discrimination and constructive wrongful terminations.

Potential Liability. A director's due diligence obligation can be satisfied by other means that don't create potential liability. It can be done through the managing agent, industry experts and legal counsel. If a director wants to personally investigate a particular matter (and is qualified to do so), he should first get board permission. Otherwise, he may be incurring liability for himself as well as the association. 

RECOMMENDATION: Each year following their annual meeting, incoming boards should meet with legal counsel to go over their rights and responsibilities as directors. It will help them avoid stepping on landmines during their tenure and function more cohesively as a board.

WHO OWNS THE BALLOTS?

QUESTION: A third-party inspector of elections is denying a post-election ballot inspection by claiming the election materials belong to him, not to the association. He will permit an inspection when ballots are returned to the association in one year, at the point when the election can no longer be challenged! We say the election materials belong to the association and the inspector is merely the custodian.

ANSWER: You are correct. The association owns the ballots not the inspector. The election inspector is hired by the HOA to perform a service...count the ballots and hold them for one year so no one can tamper with them. As such, the inspector is the custodian not the owner.

Inspection Rights. Although limited, members have inspection rights.

If there is a recount or other challenge to the election process, the inspector or inspectors of elections shall, upon written request, make the ballots available for inspection and review by an association member or the member’s authorized representative. (Civ. Code §5125.)

Some take the above language to mean that an inspector is not required to produce ballots except for a recount or challenge. Refusing to produce them creates suspicion the inspector is hiding something. Moreover, to satisfy the statute a member need only state he intends to challenge the election. Accordingly, the better policy is to produce the ballots upon demand by a member.

No Right to Copy. Election materials do not fall under the list of records that members have a right to copy. (Civ. Code §5200.) There is no provision in the Davis-Stirling Act, the Corporations Code or the Election Code that provides for the copying of ballots or other election materials. Hence, members have a right to inspect but not to copy ballots.

Inspection Costs. Since professional inspectors do not work for free, there will be a cost associated with the inspection. The issue of who pays for the inspection is not covered by the Davis-Stirling Act. For guidance, we can turn to California's Election Code. The Code requires the person requesting a recount to deposit monies with the election official to cover the cost. (EC §15624.) 

CONCLUSION: Accordingly, it would be reasonable to require the person demanding the inspection to bear the cost. He can either pay in advance to the inspector or reimburse the association for the cost.  The Davis-Stirling Act gives associations general authority to impose fees to defray costs (Civ. Code §5600(b)). The payment method would be at the discretion of the inspector of elections, not the homeowner.

GOOD FAITH REQUIREMENT

GOOD FAITH REQUIREMENT

QUESTION: Board directors must carry out their duties in "good faith." What does that mean?

ANSWER: As fiduciaries, boards are held to a higher standard. To avoid personal liability for their decisions, the Business Judgment Rule requires directors to act in good faith, in the best interests of the association, and with reasonable inquiry. The good faith element is sometimes referred to as bad faith or lack of good faith when the requirement is violated by a director.

Common Area Repairs. An example of bad faith is for a board to knowingly cause a vendor to breach his contract so the association can cancel the agreement and enter into a less expensive one with another company. The board is arguably acting in the best interests of the association (saving money by reducing the cost of the construction project) but they are doing so in bad faith. One enterprising board did this following the Northridge Earthquake.

Scheming. Their association suffered significant earthquake damage and entered into an agreement with a contractor for extensive repairs. After work commenced, a new director was elected to the board. He convinced his fellow directors they could save a lot of money if they hired a different company to do the work. The problem was how to get rid of the existing contractor. They met in executive session and schemed how to disrupt the work and make it impossible for the contractor to meet his obligations so they could fire him. Being conscientious directors, they recorded their meetings.

Judgment. The board carried out their plan and fired the contractor. He sued. The board's tape recordings became Exhibit "A" in the proceedings. The damage award against the association was substantial and drove it to the edge of bankruptcy. Not only did the directors breach the requirement of good faith and fair dealing with the contractor, they breached the good faith element of the Business Judgment Rule and exposed themselves to personal liability.

RECOMMENDATION: Boards should adopt an Ethics Policy and make sure their directors follow it. They should reprimand or formally censure directors who violate the policy. And, depending on the seriousness of the breach and if permitted by the bylaws, remove the misbehaving director.

20-POUND DOGS

QUESTION: Our CC&Rs say we can't have a dog over 20 pounds. Does this violate Civil Code 4715?

ANSWER: Weight pound limitations on dogs are not uncommon in condominium projects, especially midrises and highrises.
Condo Limitations. In stacked condominiums with long elevator rides, a German Shepherd, Mastiff or Pitt Bull can be a scary proposition for passengers. Even if it's friendly, a large dog can do a lot of damage if it is hyperactive and likes to jump onto people. Imposing a weight limitation resolves the safety problem for residents.
Pet Prohibitions. In my opinion, Civil Code §4715 does not apply to reasonable restrictions on size and breeds of dogs. Instead, it addresses blanket prohibitions. 

No governing documents shall prohibit the owner of a separate interest within a common interest development from keeping at least one pet within the common interest development, subject to reasonable rules and regulations of the association.

Service Animals. Service animals are the exception to weight and breed restrictions. Such limitations do not apply to a service animal assisting a disabled person.

WHO CONTROLS EXECUTIVE SESSION?

QUESTION: I am wondering if the board can exclude the manager (an employee of the management company hired by the HOA) from executive session meetings?

ANSWER: Yes, the board can exclude the manager. It's the board's meeting, not the manager's. The only exception is if the board contractually obligated themselves to have their manager at every meeting or, in the reverse, never hold a meeting without the manager being present.

BUDGET INCREASE

BUDGET INCREASE

QUESTION: Our board approved next year's budget with an increase in the monthly dues. The increase was not on the agenda and was not the subject of a separate board motion. Our manager said the increase did not require a separate notice and vote. Is this practice permitted by Davis-Stirling?

ANSWER: Your manager is correct. Approval of the budget is sufficient for any increase in assessments (up to 20%) that might be contained in the budget.

Assessment Approval. Approval requirements for an increase in regular assessments are found in Civil Code §5605. The statute requires that any increase must comply with reporting obligations found in Civil Code §5300(b). In summary, an increase is effective only if the board issues an "annual budget report".  

Budget Approval. The statute does not require a second, separate approval of the assessment increase. Once the budget has been approved by the board, the report must be distributed to the membership not less than 30 nor more than 90 days before the end of the association's fiscal year. (Civ. Code §5300(a).) It can either be a full report or a summary. (Civ. Code §5320.) Failure to distribute the report within the reporting deadline nullifies the increase. (Civ. Code §5605(a).)

VOTING RIGHTS

QUESTION: We distributed a ballot for a CC&R amendment. One owner turned in his vote and then sold his unit. Must we discard his ballot and issue one to the new owner?

ANSWER: No. The owner of record when the ballots were mailed (the record date) is the one who votes, not the buyer.

BEEPING HORN

BEEPING HORN

QUESTION: When homeowner A locks his car, the horn beeps. Tenant B screams "I will blow that ****ing car up." So, A locks his car during the day only, not at night. Unfortunately, B works out of his unit and naps during the day so he can work through the night. B is threatening to sue.

ANSWER: Your tenant sounds like an al-Qaeda recruit. First, put the association's insurance on notice of a potential claim. I know it sounds silly but you need to preserve the association's rights under its insurance policy.

Investigate. Next, your board has a duty to investigate the complaint and take appropriate action. If the horn really is a nuisance, "A" needs to stop using his remote. He can manually lock his car or have the beep disabled.

No Nuisance. If the board decides that a beep during the day is not a nuisance, the association does not need to get involved in a neighbor-to-neighbor dispute. The board should, however, document its actions and send a letter to the landlord with a copy to the tenant that it investigated the complaint and found no violation. So the board's cars don't get blown up, you may want your lawyer to send the letter.

NOTE: I don't think it's widely known but God made ear plugs for people with odd sleeping habits. They're also cheaper than a lawsuit. The landlord should consider making the investment (or get a new tenant).

                                           VOTING RIGHTS

QUESTION: We circulated a ballot to amend our CC&Rs. We had to extend the voting deadline three times to get enough ballots. One owner turned in his ballot and then sold his unit. Must we discard his ballot and issue one to the buyer? 

ANSWER: The seller's ballot is still valid. If he was the owner of record when ballots were distributed, he is the one with the right to vote. The buyer can vote in later elections.

CABLE TV CONTRACTS

QUESTION: DRE regulations of the Real Estate Commissioner state on page 282 section (E) that cable contracts can be five years. According to your hierarchy of docs, does that trump the CC&Rs restricting any contract exceeding one year ?

ANSWER: As a side note, California's Department of Real Estate was renamed the Bureau of Real Estate (perhaps to emphasize bureaucratic creep?). The Regulation you refer to is §2792.21 "Reasonable Arrangements--Governing Body Powers and Limitations." Subsection (b)(1)(E) deals with the length of contracts.

Purpose of Regulations. The purpose of the regulation is to establish reasonable standards for developers to use when they form homeowners associations. A developer's proposed CC&Rs must meet these standards or they won't be approved by the BRE.

Hierarchy of Documents. The hierarchy you refer do does not trump your CC&Rs because there is no conflict. The regulation applies to developers of common interest developments and is concerned with  cable contracts that exceed five years. If the developer's attorney drafted CC&Rs that restrict the board from approving contracts greater than one year and the BRE approved it, you're bound by the restriction. Your board would need membership approval for any agreement with a term greater than one year.
RECOMMENDATION: Once the developer has sold his units and turned over control to the membership, you can amend your CC&Rs to modify or eliminate contract limitations. We routinely add longer contract periods when we restate documents for associations. It can also be done with a simple amendment. If you want to take advantage of reduced costs associated with longer contracts, you need to amend your CC&Rs. 

IGNORING LEGAL ADVICE

IGNORING LEGAL ADVICE

QUESTION: If the association sought and paid for a legal opinion, is the board violating their fiduciary duty if they ignore the opinion?

ANSWER: If board members stick their fingers in their ears and refuse to listen to legal counsel, that's a problem. But, if they listen to the attorney's advice, weigh it against other factors and reach a different conclusion, they are not in breach of their fiduciary duties.
Independent Decision. Boards are not required to let experts and lawyers make decisions for them. For example, an attorney and a termite expert might both advise a board to tent their condo buildings to stop a termite infestation. After taking into account the cost of tenting, the financial condition of the association, and the disruption to members who must be moved out of their buildings, the board can decide to spot-treat even though tenting is the superior method.
Business Judgment. This was the scenario in a case that made it all the way to the California Supreme Court. The Court sided with the board and held that, 

...where a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion...to select among means for discharging an obligation to maintain and repair a development's common areas, courts should defer to the board's authority and presumed expertise. (Lamden v. La Jolla Shores; Corp. Code §7231(a).)

Bad Advice. A second scenario under which boards can deviate from legal advice is when they believe the attorney is not knowledgeable or reliable in the issues presented. For example, if a divorce lawyer offers legal advice about HOA corporate matters, the board can (and should) disregard the advice. Instead, they should seek counsel from an experienced corporate attorney with expertise in community association law.

RECOMMENDATION: Boards should be cautious about discounting competent legal counsel. If directors are uncertain about the advice given, they should get a second opinion.

CITIZEN'S ARREST

DRAINING POOLS TO SAVE WATER

QUESTION: Since we are in a severe drought and our members barely use the pool, are we obligated to keep it open? It seems like a waste of water and money and we would like to drain it. Does the board have the authority to close the pool?
ANSWER: If they have good reason, boards can close and drain a pool. Often it's done when a pool needs to be replastered. The closure is short-term and the pool refilled with water. Your scenario is different since the closure would be long-term. Doing so could damage your pool.
In-Ground Pools. In-ground fiberglass and concrete pools are built to withstand the pressure of dirt against them when drained. Even so, ground pressure on fiberglass pools can cause side walls and floors to bulge and split. If ground water is high enough, hydrostatic pressure can cause an empty concrete pool to act like a ship and float several inches. This will break the coping/bond beam and damage the surrounding decks and pipes. Insurance does not cover such damage.

UV Damage. Pools built on solid concrete foundations or in a concrete vault are immune to hydrostatic pressure. However, they are not immune to solar damage. Direct sunlight will dry out plaster, causing spider cracks and tiles to pop off. When the pool is eventually refilled, water will seep into the cracks causing the plaster to blister and crumble. This is also not covered by insurance.

Safety Issues. The possibility of someone taking a swan dive into an empty pool should keep boards up at night. Associations that drain their pools should make sure they lock their gates and post warning signs. Even so, drunks have been known to climb fences for midnight swims. Finding a body at the bottom of an empty pool has a way of driving down property values. Plus there is the problem of cleaning up the mess.

RECOMMENDATION: Before an association drains its pool to save money, the board should talk to a pool construction expert, their insurance broker, and legal counsel.

CITIZEN'S ARREST

QUESTION: Our highrise building looks onto another highrise where a resident regularly watches porn on his big screen TV. We asked the neighboring building manager to encourage him to lower his shades. This had the opposite effect. He now leaves his shades completely open, watching in the nude and single-handedly participating. Do we have any recourse?

ANSWER: That is an ugly visual. If the porn junkie is in a building that is not part of your association, your options are limited.

Police. The police can be notified. They will talk to the resident but not arrest him unless they witnessed the illicit activity. To arrest him, you would have to accompany the police to the building and make a citizen's arrest. Penal Code §837 states, "A private person may arrest another: (1) For a public offense committed or attempted in his presence..." 

Public Offense. A "public offense" is defined as a felony, misdemeanor or infraction. (Penal Code §16). Is your neighbor's behavior a public offense? According to California Penal Code §647(a), engaging in lewd conduct in a public place is a misdemeanor.

The catch is the "public place" part of the statute. Lewd conduct by a lone adult in the privacy of his home wouldn't normally interest the police or the courts. In your situation, your neighbor is knowingly making his conduct visible to his neighbors. Accordingly, action can be taken.

RECOMMENDATION: Before you rush over and make a citizen's arrest, you should consider the possibility of retaliation. It's clear your lewd neighbor does not have any boundaries. If a visit by the police does not resolve the problem, your best bet may be a strongly worded lawyer letter to the miscreant.

SOCIAL EVENTS USING HOA MONEY

SOCIAL EVENTS USING HOA MONEY

QUESTION: Can the board use association funds for social events? Our CC&Rs are silent on the subject.

ANSWER: Unless governing documents specifically prohibit it, HOAs can budget for, assess and spend association monies on social events. 

Generic Language. More often than not, there is generic language in governing documents allowing associations to make decisions for the "general health, welfare, comfort and safety" of the membership. A variation is: "The Association may undertake any lawful activity, function or service for the benefit of Owners." Authorizing language is often found in the preamble of the CC&Rs, in addition to the general powers section, and in the assessments section describing the purpose of assessments. It can also be found in the bylaws and articles of incorporation.
Social Event Benefits. Do social events fall under "health, welfare and safety" categories? I believe they do. Part of being a community is knowing your neighbors, interacting with them and developing a positive community identity. Social events help make that happen. Knowing your neighbors also enhances general security for the association. Finally, developing a reputation for a positive community identity raises property values.

RECOMMENDATION: As in all things, moderation. Boards should not go overboard with extravagant parties. HOAs should also be careful about alcohol at their events and check into insurance. Then get everyone together and have steak and beer or cheese and wine, depending on your political persuasion. 

PHONED-IN VOTE

PHONED-IN VOTE

QUESTION: Can a committee member attend a meeting via phone, vote on a measure, then disconnect?

ANSWER: Board members and committee members alike can attend their respective meetings by telephone, make motions, participate in discussions and vote, provided it's a conference phone or speaker phone where participants can all hear each other. Corp. Code §7211(a)(6); Civil Code §1363.05(k)(2)(B). The statutes address director meetings but the same would apply to committee meetings. So, can a committee member (or director) call in to vote on one measure and then hangup? It may be poor form but there is nothing prohibiting it.

FORCE-PLACED INSURANCE

FORCE-PLACED INSURANCE

QUESTION: Can an HOA use force-placed insurance? Force-placed insurance is when the banks buy an insurance policy for homeowners to protect the bank's investment. I'm wondering if an HOA can do the same thing if owners fail to insure their units? The HOA needs a way to protect itself.

ANSWER: Banks are able to “force-place” insurance because of two important conditions: (i) the loan agreement gives the lender authority to do so and (ii) banks has an insurable interest in the property because the home is collateral for the loan.

No Authority to Purchase. Unless an association's governing documents grant authority, boards cannot purchase insurance for an owner and charge back the premium to the homeowner. Even if the governing documents allow it, the association does not have an ownership interest in the unit. Without an insurable interest, it's unlikely a carrier would sell them a policy.

Administrative Nightmare. Assuming an association could purchase individual policies for owners, it creates an administrative problem for the association. To purchase insurance for owners who fail or refuse to purchase their own insurance, the board would have to monitor every owner's insurance. If there are 100 units in the development, there are 100 different insurance policies to monitor with 100 separate expiration dates to calendar and track. Since homeowners could let their coverage lapse at any time during the policy term by simply missing one or more monthly installments, the board would need to monitor their insurance daily and immediately purchase coverage for the owner when it lapsed. 

Expensive. Because force-placed insurance is very expensive, the homeowner has incentive to buy his own insurance as soon as the costly back-billed premiums hit. This creates yet another task for the person monitoring the insurance. Once the homeowner buys his own insurance, the force-placed coverage must be immediately removed and any unused premiums refunded to the homeowner. Forced-place insurance is so complex that even lenders don’t administer their own programs; they rely on third-parties to oversee them.

RECOMMENDATION: Instead of force-placed insurance, associations should consider amending their governing documents to require owners to carry insurance. To protect the association from administrative headaches and potential liability, the amendment needs to exempt the association from the duty of monitoring the provision.

E-CIGARETTES

E-CIGARETTES

QUESTION: My HOA wants to adopt a complete smoking ban--no smoking in the common areas and no smoking inside units. Can we also ban e-cigarettes?
ANSWER: Good question. Electronic cigarettes are battery-powered devices that deliver nicotine in a vapor to the user. According to advocates, they have fewer toxins than regular cigarettes and none of the tar, making them less harmful to users than traditional cigarettes. Moreover, there is no second-hand smoke, no carcinogens in the vapor and no odors; therefore, no problem. Not everyone agrees.

Airlines. The Department of Transportation adopted a policy that passengers cannot smoke e-cigarettes on commercial aircraft. When proposing the ban, the DOT stated:

In light of the unknown health risks with the use of electronic cigarettes by individuals who ‘smoke’ them or the people around them and the growing availability and use of electronic cigarettes, the Department is proposing this amendment … to explicitly ban the use of electronic cigarettes aboard aircraft.

Governments. Two weeks ago, the European Parliament issued strong regulations requiring health warnings on e-cigarettes. Tuesday, the second largest city in the country, Los Angeles, voted to prohibit them in all workplaces as well as parks, city beaches and outdoor dining areas. Contra Costa County, Richmond and Carlsbad have already banned them and other cities around the state are taking steps to either regulate or ban them.

Universities & Businesses. The University of California banned e-cigarettes on all its campuses. It did so because many of the elements in their vapor "are known to cause respiratory distress and disease." According to the U.S. Food and Drug Administration samples of the nicotine liquid they tested had "detectable levels of known carcinogens and toxic chemicals. The National Business Group on Health issued a "Fact Sheet" on why businesses should consider banning them in the work place. 

HOA Common Areas. It is clear from the growing number of regulatory agencies, municipalities and business organizations that associations have sufficient basis to ban e-cigarette use in the common areas. Boards can do so with a simple rule change. The rationale for banning them inside condos, however, is less clear.

Inside Condos. Because condominiums (and most stock cooperatives) have shared walls, ceilings and floors where cigarette smoke can drift into adjoining units, the annoying odors and carcinogens give associations a solid basis for banning smoking inside units, and many already have done so. Banning e-cigarettes, however, may be more difficult to justify since they are not a fire hazard and their vapors might not create detectible odors in adjoining units or cause harm to neighbors.

RECOMMENDATION: If associations decide to completely ban all smoking, including e-cigarettes, they should do so via an amendment to the CC&Rs. If the ban is a recorded restriction, it is presumed reasonable and the burden is on the challenger to prove it is not.

DIRECTOR QUALIFICATIONS VIA RULE CHANGE

DIRECTOR QUALIFICATIONS VIA RULE CHANGE

QUESTION: Our bylaws have only one qualification for serving on the board--that directors be members. By a rule change, the board added a new requirement that a director's primary residence must be in the development. The changeeliminates 40% of the membership from holding office.Some believe the president took this action because of disagreements with individuals who do not live in the complex who may run against her. Doesn't a change like this need a vote of the membership?

ANSWER: Because of a recent court decision, it appears that boards can unilaterally add new director qualifications without input by the membership.

Friars Village. Friars Village HOA had only one qualification for serving on the board, the nominee had to be a member of the association. The board adopted a rule that no one could serve on the board with another director related by blood or marriage. It's a good requirement but it was done without membership approval. A homeowner sued in small claims to invalidate the rule since it was inconsistent with the bylaws. The board moved the dispute to superior court and the case ultimately ended up in the court of appeals.

Reasonableness Requirement. The court of appeals concluded that boards have the authority to adopt additional director qualifications without the need to amend the bylaws, provided the qualifications are "reasonably related to the performance of the Board and will serve to protect its overall mission -- protecting the best interests of the Association." (Friars Village Association v. Hansing.) I'm not comfortable with the court's decision but it's now the law.

Residency Rationale. Is the residency requirement adopted by your board reasonable? Probably. The argument in favor of residency is that board members who live in your development will have a stake in the community and will be more inclined to act in the best interests of the membership.

RECOMMENDATION: Despite the arguments for a board-imposed residency requirement, a judge could easily decide that disqualifying 40% of the membership from serving on the board is not reasonable. Therefore, the safer course of action is to seek membership support for new director qualifications and then amend the bylaws. Doing so reduces the risk of a legal challenge and an adverse ruling.

CUMULATIVE VOTING 

QUESTION: Thanks to cumulative voting, an attorney whose home was heading into foreclosure got herself elected to the board. She then sued the board for failure to enforce the CC&Rs. She then demanded the association's insurance represent her as she was doing this "for the good of the community." Our insurance company declined with the explanation that "We don't pay for people to sue us." It makes one wish there was some kind of entrance exam before becoming an HOA owner.

ANSWER: As someone once noted, "Common sense is like deodorant--the people who need it most never use it." The scenario you describe is exactly why associations should amend their bylaws to eliminate cumulative voting. It helps to keep some of the more ethically challenged owners off the board. Or, if they happen to get elected, they can more easily be removed by the membership.

UNRECORDED DEEDS

UNRECORDED DEEDS

QUESTION: An owner of record sent me an unrecorded deed showing that he put his wife on title. Does an unrecorded deed make his wife a member?

ANSWER: Not necessarily since ownership may not have transferred. At this point, it is impossible for the board to know whether the wife is a member or not.

Membership Defined. As provided for in Civil Code §4160, membership is tied to ownership of a separate interest in a common interest development, e.g., a condominium or lot. Transfer of real property requires the following:

1. It must be in writing;
2. Parties must be properly identified;
3. Parties must be competent to convey and receive property;
4. The property must be sufficiently described to distinguish it from other real property;
5. There must be granting language;
6. The deed must be signed by the conveying party; and
7. It must be delivered and accepted.

Determination. "Delivery" means more than giving someone physical possession of a deed. In the situation you described, the husband must have the intention to immediately pass title to his wife. For all you know, the unrecorded deed is nothing more than a ruse by the husband to get his wife on the board. There are two ways to determine if a valid transfer occurred: (i) a ruling by a court or (ii) a recorded deed. Obviously, a recorded deed is the only practical option for associations to know whether ownership actually transferred.

RECOMMENDATION: In my experience, the only time someone waives around an unrecorded deed is to put an unqualified person on the board to cause problems for the association. Whenever proof of membership is at issue, associations should require a recorded deed. 

INSPECTING GARBAGE

QUESTION: Our condos have an ongoing problem with residents not placing their garbage bags properly into the bins. This creates a mess when workers move the bins because bags break and spread garbage around. Can the board inspect the bag's contents for the purpose of identifying who is causing the problem?

ANSWER: Yes you can. People have no reasonable expectation of privacy when they put their trash in a public area. (California v. Greenwood, 486 U.S. 35 (1988).) Trash collectors, the homeless, neighbors, the police, anyone can go through garbage once an owner puts it in a trash bin. Therefore, a board can go through the trash to identify who is causing the problem.

RECOMMENDATION: Board members or staff digging through trash is unsanitary and unseemly. If you want to catch scofflaws, you should install a camera in the trash area. Don't use hidden cameras. Highly visible cameras help deter bad behavior. Hidden cameras not only offend people, they reveal things you may not want to know.

DRUNK BOARD MEMBER

DRUNK BOARD MEMBER

QUESTION: What do you do about a board member who shows up drunk at meetings?

ANSWER: To avoid personal liability for their actions/decisions, directors must perform their fiduciary duties "with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances." (Business Judgment Rule.) That standard is hard to meet when a board member is DUI (Director Under the Influence).
Reckless Indifference. As with drunk drivers, a drunk director is not competent to get behind the wheel. Their impaired judgment is self-induced and could be deemed reckless indifference or deliberate disregard of their obligations to the membership and an abdication of their duties as a director. Such behavior is specifically excluded from protection by Corporations Code §204(a)(10)(iv)&(v), i.e., it exposes the director to personal liability.

Fellow Directors. What impact does it have on fellow directors? The worst case scenario is the drunk director gets into a fight with and seriously injures a homeowner at a board meeting. The injured owner then sues the board for not previously taking action against the inebriated director. While the likelihood of success against all directors would depend upon foreseeability of the impaired director's actions, the lawsuit would certainly succeed against the problem director. The plaintiff would also prevail against the association since the director's actions occurred while in his official capacity.

Censure. If the board does nothing, it has the effect of condoning the director's bad behavior--something that would certainly be used against the board at the time of trial. To protect themselves and the association, fellow directors should warn the impaired director to go home and sleep it off and never again appear at a meeting intoxicated. If the bad behavior continues, the board should censure the director. 

Removal from Office. If the director is an officer (president, secretary, treasurer), he can be removed from office by fellow directors. Unseating him from the board however, is not an option unless the bylaws specifically authorize it. That is something normally reserved for the membership via a recall.

Ethics Policy. If boards have not already done so, they should adopt a "Code of Conduct" or "Ethics Policy" to address these kinds of situations. 

NOTE: If you adopt an ethics policy, be sure to include an exception that allows directors to get drunk after meetings where they have to deal with particularly difficult homeowners.

DELINQUENT LANDLORD

DELINQUENT LANDLORD

QUESTION: Our board is frustrated with delinquent homeowners who collect rent on their units but refuse to pay their dues. Is there anything we can do?

ANSWER: There is a very effective provision I added to CC&Rs 20 years ago to address this issue. It's called a supplemental lease agreement or lease addendum.

Lease Terms. Whenever an owner leases his unit, both the owner and the tenant are required to sign a lease addendum supplied by the association that requires, among other things, (i) the lease be for the entire unit; (ii) no assignments or subleases are allowed; (iii) the lease is for not less than one year; (iv) tenant agrees to comply with the association’s governing documents and be subject to the its disciplinary procedures; (vi) owner assigns rents from his unit to the association in the event he becomes delinquent; and (vii) tenant agrees to pay the owner's assessments should he become delinquent. 

Effective Tool. The agreement provides a tool that associations need to hold both the homeowner and the tenant accountable since they are parties with the association to the agreement. When I go into court with CC&Rs and a signed agreement, neither the owner nor the tenant have a defense. Normally, a demand letter from my office with the relevant documents enclosed and a threat of litigation is sufficient to get prompt payment of the delinquent assessments. Only once have I had to go into court to enforce the lease addendum.

Rules Enforcement. The addendum is also effective in bringing a wayward tenant into compliance with the rules. Per the signed agreement, the owner and the renter are subject to disciplinary action. Both can be fined and, if necessary, sued. Moreover, the agreement gives the association the power to evict the tenant for violation of the terms of the lease addendum.
RECOMMENDATION: If your association has problems with delinquent landlords and/or problems with rules enforcement involving tenants, a lease addendum may solve both problems. 

CONFLICTING DOCUMENTS ON CUMULATIVE VOTING

CONFLICTING DOCUMENTS ON CUMULATIVE VOTING

QUESTION: Our membership approved revised CC&Rs eliminating cumulative voting but failed to pass a bylaw amendment doing the same. What do we do now?

ANSWER: It depends. Under the new Davis-Stirling document hierarchy, any conflicts between your CC&Rs and your bylaws are settled in favor of your CC&Rs. Accordingly, if your CC&Rs prohibit cumulative voting and your bylaws authorize it, your documents conflict and your CC&Rs prevail. In this scenario, you can drop cumulative voting.

Amendment Language. If, however, your CC&R amendment simply deleted references to cumulative voting so your CC&Rs are now silent on the issue but your bylaws authorize cumulative voting, there is no conflict between the documents and your bylaws prevail. In this scenario, you're stuck with cumulative voting until you successfully amend your bylaws to drop cumulative voting or amend your CC&Rs to prohibit cumulative voting.

PAYMENT PRIORITY

QUESTION: We have many HOA boards who are frustrated at seeing unpaid late fees on their aged receivables report. Recently at an industry event, we were told that if an association changes its delinquency policy to say so, boards can apply owner payments to outstanding late fees before applying the payment to outstanding assessments. Is that true?

ANSWER: No it's not true. It doesn't matter if an association's CC&Rs, bylaws and collection policy all say you can apply payments to late fees first and then principal. The law states:

Any payments made by the owner of a separate interest… shall first be applied to the assessments owed, and, only after the assessments owed are paid in full shall the payments be applied to the fees and costs of collection, attorney's fees, late charges, or interest. (Civ Code 5655(a).)

Unless a statute defers to an association's governing documents, the statute prevails. In this case, the statute does not defer and payments must first go to assessments. To remedy the problem of unpaid late fees, your board can sue a recalcitrant member in small claims court for the unpaid late fees. Oftentimes owners will immediately pay rather than go through the hassle of appearing in court and risk a judgment against them.

NO CANDIDATES

QUESTION: We sent out a call for candidates for our annual election and there were no volunteers. If the law says we have to hold an election each year, how do we have one without candidates?

ANSWER: HOA governing documents normally call for an annual meeting at which, among other things, directors are elected. Even if no one shows up, holding a meeting satisfies Corporations Code §7510(b) and your governing documents.

Floor Nominations. If your election rules allow floor nominations and if someone shows up at the meeting and if that person is willing to nominate himself from the floor, you can fill an empty seat. That assumes you achieve quorum and it further assumes the person has not already voted for someone else (once cast, ballots are irrevocable).

No Annual Meetings. I know some boards dispense with annual meetings altogether and nobody cares...until someone is unhappy with a board decision and sues alleging the board's decision was ultra vires because no election was held. While plaintiff's position is contrary to statute (directors remains on the board until successors have been elected; Corp. Code §7220(b)), the association must defend against the lawsuit.

RECOMMENDATION. If apathy is running rampant in the community, you probably won't make quorum so you can't elect a floor candidate even if you shanghaied someone, dragged them to the meeting and raised their hand while they were still drugged. What you can do, however, is appoint them to the board. Once the drug wears off, the deed will have been done.