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.