PIT BULLS

PIT BULLS

QUESTION: Our condo association is plagued with prostitutes, drug use and pit bulls. I'm a non-voting member of the board and want to know what we can do about the pit bulls.

ANSWER: Before we get to the interesting part of your question, what is a nonvoting member of the board? Without the power to vote, a nonvoting director is really an advisor not a director. The Corporations Code defines "directors" as:

natural persons designated...elected or appointed...to act as members of the governing body of the corporation... A person who does not have...voting rights as a member of the governing body of the corporation, is not a director...regardless of title. (Corp. Code §5047.)

Your association's legal counsel should review your governing documents to see if they truly provide for nonvoting directors. If so, they should be amended since there may be attorney-client privilege problems if non-directors are privy to executive session meetings involving the association's attorney.

Pit Bulls. I noticed it's a class of dogs that bothers you, i.e., compact muscular dogs with great jaw strength such as pit bull terriers, Staffordshire bull terriers, and bulldogs. If your board were to get rid of the prostitution and drug use, I suspect most of your pit bulls would join the exodus.

RECOMMENDATION: The task will be daunting but your board should work with the police and legal counsel to clean up the development. Or, in the alternative, you could designate yourselves a "sanctuary association" for drug dealers and prostitutes and then apply for federal subsidies. You could be eligible for truckloads of money.

DECLARANT LANGUAGE IN DOCUMENTS

QUESTION: Our CC&Rs and bylaws have never been revised. In a number of provisions, powers are given to the "Declarant." Since the builder has been gone for over 20 years, should these provisions be removed from our documents?

ANSWER: Yes they should.

Declarant Defined. As defined by the Davis-Stirling Act, a "declarant" is one who creates the original documents that govern the association.(Civ. Code §4130.) Declarants normally give themselves a great deal of power and voting rights so they can complete the development and sell units without interference from homeowners.

Confusing. Declarant language can be very confusing to directors and members alike. Is the association a successor to the declarant? Does the association have the powers of the declarant? Is the association allowed to modify or delete declarant language? In short, the association is not a successor to the developer and does not have a declarant's powers. And yes, associations can delete declarant provisions once the builder no longer has an interest in the development.

RECOMMENDATION. Associations should, at some point, update their documents. When they do, declarant language should be deleted along with all the legalese that goes with it. It gives you the opportunity to clarify maintenance issues (always a source of conflict and potential liability), add director qualifications, incorporate changes in the law, and make the documents easier to read.

WHEN IS A DAY A DAY?

QUESTION: I am trying to obtain the legal definition for a "day" as it applies to our HOA. If a "2-day notice" of a meeting is given at 8:30 on a Thursday night, Saturday morning at 9:30 is not 48 hours.

ANSWER: Fortunately, defining a day is easier than defining what the meaning of "is" is. The Sixth Edition of Black's Law Dictionary states, "This word ["is"], although normally referring to the present, often has a future meaning, but is not synonymous with 'shall have been.' It may have, however, a past signification, as in the sense of 'has been.'" Like I said, it's not easy to define--even presidents struggle with it.

The definition of "day," however is fairly straightforward. Black's Law Dictionary defines it as "A period of time consisting of twenty-four hours" or "The period of time during which the earth makes one revolution on its axis." It's when you get to the fourth definition that it gets contrary: "The whole or any part of period of 24 hours from midnight to midnight." Fortunately, that definition came from a case out of Kentucky so I think we can discount it. I prefer the common-sense 24-hour definition. 

RECOMMENDATION: It's always better to err on the side of full 24-hour periods so as to avoid legal challenges. If you give 4-day's notice of a board meeting by posting on Monday at 5:00 p.m., the meeting should not be called to order until Friday at 5:00 p.m.

PROTECTING COMMITTEES FROM LIABILITY

PROTECTING COMMITTEES FROM LIABILITY

QUESTION: I know that board members are legally protected but what about committee members (like a rules committee, newsletter committee, finance committee, etc.)? Are they also protected under the Civil and Corporations Code?

ANSWER: Unfortunately not. By statute, board members have a higher level of protection but the same is not true for committee members. They do, however, frequently have protections under the association's governing documents and and its insurance policy. 

Advisory Role. One way to reduce potential liability is to make sure your committees are advisory only. Without decisionmaking authority, they make a much smaller target. Two exceptions to advisory-only committees are executive and architectural committees. The first is made up entirely of directors and the second derives its authority from the governing documents. The surest way to protect all volunteers is for the association to purchase insurance to cover them. 

RECOMMENDATION: Proper D&O Insurance is a must. Make sure your association's policy covers committee members as well as board members. Adopt an ethics policy so committee members know what constitutes proper and improper behavior. And, adopt committee charters so members know they are advisory only. Finally, if your governing documents are silent about protections for committee members, you should consider amending your documents. 

WHEN A DIRECTOR SUES

QUESTION: Our HOA has only five owners and all owners are on the board. Can an owner, under the D&O coverage, sue the board for an issue as an individual owner? My thought is that you can't sue yourself, yet they wear two hats...board member and homeowner. 

ANSWER: Yes, a director can sue his association. Your D&O insurance may deny coverage but it does not prevent him from suing. 

Suing Himself. You're right that, as a practical matter, your fellow director is suing himself when he sues the association. He can do it because, from a legal perspective, he is not suing himself. He is suing a separate legal entity--the association.
ADR. Before your unhappy director can sue, he must first determine if the governing documents require binding arbitration rather than litigation. If so, he must follow the governing documents. If your documents are silent, the plaintiff can go into court. Depending on what he seeks and why, the Davis-Stirling Act may require that he first endeavor to submit the dispute to alternative dispute resolution.

Recusal. During the litigation, the plaintiff director must recuse himself from any discussions or votes related to his lawsuit. If he refuses, the board can form an executive committee (minus the plaintiff) to work with the association's attorney on the lawsuit. If the governing documents prohibit a director from serving while in litigation with the association, the board can vacate his seat.
Insurance. A consideration for the plaintiff is that the association's insurance may refuse to defend. Some insurance policies exclude coverage if one director sues another director. D&O insurance is designed to protect directors from third-party claims, not infighting between directors or claims against current or former directors for imprudent business practices. This is known as an “Insured vs. Insured” exclusion.

Special Assessment. If the carrier denies coverage, the membership could be specially assessed to raise the funds needed to defend against the action. If that happens, the plaintiff may find himself an outcast. He should be careful about pooing where he eats.

RECOMMENDATION: The board should avoid litigation and make every effort to work out their differences.

ALLOCATING WATER BILLS

ALLOCATING WATER BILLS

QUESTION: I rented my condo to a family of six--two adults and four children. The HOA now wants owners to pay for water based on the number of occupants rather than equally as is currently done. Can the HOA legally require me to pay for water based on the number of occupants?

ANSWER: In light of the drought and the unequal usage created by a unit full of renters, allocating expenses based on usage has two advantages for the association: fairness and conservation.

Fairness. On the equity side, why should an elderly widow who lives alone subsidize water for a unit with six renters--especially when the landlord is making money on the rental? The more equitable approach is for each owner to pay their own share of water usage.

Conservation. Making owners pay based on usage also creates an incentive to conserve water. Owners will use less water when the money flowing out of their pocket is tied to the water flowing out of their faucet.

It Depends. Whether the association can change its billing practice depends on its governing documents. If the CC&Rs clearly require that the cost of water must be shared equally regardless of usage, the association must amend its documents before it can change its billing.
Renters. If the CC&Rs are silent on the issue, the association bill owners based on estimated usage. In Watts v. Oak Shores, the court of appeals supported the association's authority to allocate cost. Watts was a landlord whose renters increased the association's expenses. The board estimated those costs and assessed Watts. Watts sued and lost. He then appealed and lost. (He has now petitioned the Supreme Court--we don't know yet whether the court will hear his petition.)

Reasonable Allocation. I believe the principles delineated in the Watts decision have a broader application than just renters. If an association is master metered, it could estimate water usage based on the number of people living in a unit. The court of appeals wrote that:

Nothing in the language of [Civ. Code §5600(b)] requires the exact correlation between the fee assessed and the costs for which it is levied... In some instances, such an exact correlation may be impossible to obtain. In other instances, the costs of studies necessary to obtain an exact correlation may be prohibitive... The most reasonable interpretation of [Civ. Code §5600(b)] is that it requires nothing more than a reasonable good faith estimate of the amount of the fee necessary to defray the cost for which it is levied. (Watts v. Oak Shores.)

According to the California Water Resources Control Board, residential water use averages averages 77 gallons per person per day but ranges from 43 gallons to 427 gallons per person depending on the locale. A map of California published by the New York Times shows water usage around the state. An association could use such numbers to estimate water usage and levy appropriate charges.
RECOMMENDATION: Condominium associations should have legal counsel review their governing documents to see if they can bill owners based on water usage. If not, they need to amend their documents. If documents are silent or allow it, boards should contact their local water board for per person average water usage. In addition, boards should implement additional water conservation by addressing leaks inside owners' units. 

CONSERVING WATER DURING THE WORST DROUGHT IN CA HISTORY

RESERVE FUNDS AND DROUGHT-FRIENDLY LANDSCAPING

RESERVE FUNDS AND DROUGHT-FRIENDLY LANDSCAPING

QUESTION: In light of the drought emergency, can reserve funds be used for drought-friendly landscape renovations?

ANSWER: I checked with Robert Nordlund, President of Association Reserves, Inc. to see what he thought. Following is his response:

Existing Landscape Reserves. Many associations already have landscape-related projects in their reserve study, the most common being tree trimming. Many others have periodic landscape renovation projects to freshen up the appearance and health of their greenscape. If an association has a landscape renovation reserve component, those funds could be used for replanting and redesigning with drought-tolerant plants. 

Borrowing. If they don't have funds already set aside, another strategy is to borrow from reserves with these borrowed funds expected to be recouped by savings from lower water usage. While borrowed reserve funds must be repaid within twelve months, the following allows for the delay of repayment:

...the board may, after giving the same notice required for considering a transfer, and, upon making a finding supported by documentation that a temporary delay would be in the best interests of the common interest development, temporarily delay the restoration. (Civ. Code 5515(d).)

Savings. If you find that a $50,000 landscape renovation project would result in a projected $50,000 water savings over three years, and if your reserve balance can support the expense without delaying necessary reserve projects, an updated reserve study can provide the necessary documentation. The result is a zero-interest loan from reserves to implement the project.

Additional Points. Make sure the project meets your architectural requirements. You don’t want to replace grass in your greenbelts with artificial turf if you’ve been denying homeowner requests for similar projects in their front yards. If you are installing artificial turf (or something else that will need renovation or replacement), remember to add it to your reserve component list.

RECALL WITH AN INTERVENING ELECTION

RECALL WITH AN INTERVENING ELECTION

QUESTION: Less than sixty days before our annual meeting a group of homeowners submitted a petition to recall the existing board. As required by statute, the board gave notice of a special meeting. It will take place a month after the annual meeting. Under the circumstances, what is the effect of the petition?

ANSWER: In my opinion, it's voided by the intervening election.

Pre-Election. Recall petitions submitted close to an annual meeting are the most ill-conceived kinds of petitions. The petitioners should have their heads examined. If a recall is held prior to the annual meeting and is successful, the new directors only fill the remaining terms of the ones they replaced. That means they may be up for reelection in thirty days. It's a huge waste of time and money.

Post-Election. If the recall is scheduled to follow the annual meeting (as you described), the petition is no longer valid. The board for which the petition was submitted no longer exists. Even if the same directors are elected, it's a new board with new terms in office. If the petitioners want to recall the newly elected board, they need to submit a new petition (and then explain why members should recall the board they just elected).

SUSPICIOUS INSPECTORS OF ELECTION

SUSPICIOUS INSPECTORS OF ELECTION

QUESTION: The Davis-Stirling Act states that ONE or THREE independent third parties must be chosen as inspectors of election. Since tabulations must take place in public, it appears suspicious when there are only two at the table when the law requires one or three. If the Inspector brings someone to open the ballots, does he count as an inspector because he is touching and unfolding ballots? If the assistant SORTS the ballots (touching the ballots) and asks questions to the Inspector about ballots, does he become an inspector?

ANSWER: There is nothing suspicious or inappropriate in what you describe. The Davis-Stirling Act addresses the number of inspectors (one or three) not the number of assistants (unlimited). (Civ. Code §5110(a)). What's more, the Act actually requires that election rules:

Allow the inspector or inspectors to appoint and oversee additional persons to verify signatures and to count and tabulate votes as the inspector or inspectors deem appropriate, provided that the persons are independent thirdparties. (Civ. Code §5105(a)(6).) 

That means you can have one inspector and half a dozen assistants who register people, open envelopes and tabulate votes--all under the supervision of the inspector. Touching an envelope does not magically make someone an inspector. Under that reasoning, mail carriers become inspectors when they deliver envelopes to the inspector. I don't think the Post Office has that in their job description.

RECOMMENDATION. The British government distributed posters to the people of England during World War II to help get them through the Nazi aerial bombardment. One of them read, "Keep Calm and Carry On." That applies here. Don't over-think the inspector issue or you'll give yourself a stroke.

DOES DAVIS-STIRLING APPLY?

QUESTION: Does the Davis-Stirling Act pertain to a nonprofit mutual benefit corporation? I am told it only pertains to public nonprofit corporations.

ANSWER: An association's corporate status does not matter--if it meets the definition of a common interest development (CID), Davis-Stirling applies. By the way, most HOAs are nonprofit mutual benefit corporations not public benefit corporations. Some associations are not even incorporated and still fall under the Act. In addition, associations in existence prior to the Act are also bound by it.

PARTICIPATING IN BOARD MEETINGS

QUESTION: Our board says members are not allowed to speak until the end of the meeting. Therefore, we are not allowed to express our opinions before an action is taken on an item on the agenda. Should we not be allowed to speak when that item comes up for discussion?

ANSWER: Members have a right to observe board meetings but they don't have a right to participate in the board's discussions and votes. This is the same policy followed at city council meetings--once the public forum is closed, citizens cannot interrupt council meetings to comment on issues. It's even more restrictive on state and federal levels where there is no right to an open forum when the legislature/congress is in session.

Open Forum. The only time members have a right to participate in meetings is during the "open forum" portion of an open meeting (Civ. Code §4925, §5000(b)) and only for a reasonable time established by the board. Members can ask questions but directors are limited in how they can answer them.

Inviting Comments. Although members do not have a legal right to participate in board discussions, the president can invite comments from the audience on particular items of business if he so chooses. This is at the discretion of the board. Once comments have been received, discussion can be closed and a vote taken by the directors.
 

FEEDBACK

Drought Self-Help. A board member discovered a watering device on a homeowner's patio area. Water was dripping everywhere so the board member decided to climb over the wall and confiscate the watering device and refuses to give it back to the homeowner. What are the board's rights? -Reader

RESPONSE: I understand your board member's good intentions but directors should not be jumping fences and confiscating things from members' patios, balconies, yards, etc. It makes them vulnerable to legal action for trespass and theft. There are better ways to address water wasters. Start with a phone call or letter and proceed to hearings and fines. If this fails, bring in the lawyers. If your hyperactive board member continues to act without authority, you should censure him. 

REPORTING RENTALS TO BANKS

REPORTING RENTALS TO BANKS

QUESTION: Is my HOA required by law to gather data with regard to occupancy (owner or renter) in our development? I am unable to refinance because most lenders require this information.

ANSWER: No, there is no such requirement. Some boards may have stopped tracking rentals since they can't do anything about them--a perverse gift of the California Association of Realtors (CAR). In 2011, CAR pushed through legislation crippling the ability of associations to adopt rental caps.

As a practical matter, most associations provide such information (as best they can) to assist owners with the refinancing and sale of their units since lending institutions recognize the damaging effect too many rentals have on property values and the stability of community associations. 

Even though there is no statutory duty to gather rental information, if the matter were litigated, an argument could be made that (i) the information is vital to members, (ii) impossible for members to collect, but (iii) within the board's power to gather, therefore, (iv) boards have a duty to provide the information. Litigation, however, is not the best solution because of the cost, the uncertainty of the outcome, and the further delays it would create in the sale of units.

RECOMMENDATION: Lobby your board. The association's management company can determine the number of rentals by looking at billing records and making phone calls. Those with offsite billing addresses are either landlords or part-time residents. Telephone calls to those individuals would provide the information you need. If there is a cost to gather the data and the board is unwilling to pay it, offer to pay. It is considerably less expensive than litigation and will provide a much faster result.

PAINT COLORS

QUESTION: We are in the process of selecting paint colors for the exteriors of our buildings. The board chose three color schemes for membership review but several members are unhappy with the choices. Please advise.

ANSWER: It's impossible to please everyone, especially when it comes to paint colors (or carpet, wallpaper, lobby furniture, etc.). Putting it to a vote of the members is the best way to handle the situation. If the board leaves the membership out of the decision-making process, unhappy owners would have a clear target—the board—and may threaten to sue or launch a recall.

Benefit of Owner Vote. If the membership makes the selection, there is no one to recall. It also makes a lawsuit less likely since unhappy owners would have to sue the association as a whole and then try to convince a judge that the majority's decision should be reversed. I don't see that happening.

Voting Formalities. In this case, a membership vote does not require secret balloting, which is reserved for specific kinds of votes. It can be done electronically or by paper. If paper ballots are used, they can be signed or unsigned. Although not required, it's still a good idea to use an independent inspector of elections. 

DROUGHT EMERGENCY AND ARTIFICIAL TURF

Readers asked if the Davis-Stirling Act or the drought emergency voids existing HOA restrictions on artificial turf. Attorney Curt Sproul of the law firm Sproul Trost, LLP provides the answer:

Davis-Stirling. The recent amendment to Civil Code §4735 (dealing with architectural and landscaping guidelines) fell short of prohibiting artificial turf. That amendment said that “architectural or landscape policies are void if they prohibit or include conditions that have the effect of prohibiting the use of low water-using plants as a group or as a replacement of existing turf.” Although low water-using, artificial turf is to plants what a toupee is to real hair. 

Governor's Order. On April 25, 2014, the Governor adopted the following provision:

[HOAs] have reportedly fined or threatened to fine homeowners who comply with water conservation measures…To prevent this practice…I order that any provision of the governing documents, architectural or landscaping guidelines, or policies of a common interest development will be void and unenforceable to the extent [that the provision] has the effect of prohibiting compliance with the water-saving measures contained in this directive, or any conservation measure adopted by a public agency or private water company, any provision of [the Davis-Stirling Act] notwithstanding.

The Order does not mention artificial turf but does indicate that public agencies and private water companies could go further than the restrictions currently set forth in Civil Code §4735 and issue directives overriding HOA restrictions (including those related to artificial turf). That has not yet happened. 

SUMMARY. HOA restrictions on artificial turf are still valid. However, that may change. Currently, there is a bill in the legislature to add the more generic "landscaping" to the statute which, according to the author, would stop HOAs from prohibiting artificial turf (see AB 349).

MANDATORY WATER REDUCTION

MANDATORY WATER REDUCTION

This week Governor Brown imposed unprecedented mandatory water restrictions. To address the worsening drought, he ordered a 25% reduction in water usage throughout the state. Because of growing scarcity, water rates will likely spike which will adversely affect association budgets. That means boards need to look for ways to save water.

Master Metered HOAs. This is particularly difficult for master metered developments since they have no control over water usage by members inside their units. Boards can, however, hire a plumber at HOA expense to inspect all units in the complex for water leaks, for high water usage toilets, and to install water savers on showers and faucets. If presented properly to the membership, everyone should cooperate.

Some of my clients have already implemented inspection programs and made a complete list of leaky faucets, valves, supply lines, drains, toilets, shower heads, etc. throughout the development. The list also includes units that need water saving devices. Arrangements can then be made to make repairs, change toilets and install water-saving devices at a discounted rate to owners if they agree to the repairs.

For those who refuse, boards can hold hearings, impose fines, and send lawyer letters to persuade the recalcitrant to cooperate.
Common Areas. For PUDs and condominium associations alike, landscaping is an obvious source of savings. It can be addressed in a variety of ways such as (i) installing drought resistant plant materials, (ii) installing artificial turf where appropriate, and (iii) replacing old irrigation systems with "smart" systems to reduce water usage.

RECOMMENDATION: Boards should meet with plumbers, legal counsel and management to set up an inspection/repair program for all plumbing in the development along with retrofitting with low-water devices.Boards should also meet with landscapers for ideas on how best to reduce water usage. 

ABANDONED PERSONAL PROPERTY

QUESTION: We foreclosed on an owner but he left behind personal property. During the 90-day redemption period can he get his property or would it be considered trespassing? If he doesn't retrieve his belongings, when and how can they be removed? 

90-Day Hold. When real property is sold subject to a right of redemption (Civ. Code §5715(b)), the association's right to possession is deferred until the redemption period has expired and after its title has perfected. (First Nat. Trust & Sav. Bank of San Diego v. Staley, (1933) 219 Cal. 225, 227; Code Civ.Proc. §1161a (b)(2) & (3).) 

Accordingly an association has no right to either evict an owner or the owner’s tenant, or to enter the property to remove personal property until after the 90-day redemption period expires. Once the redemption period ends and title transfers, the association can dispose of personal property using legally proscribed methods.

Abandoned Personal Property. Personal property abandoned on residential premises can be removed as provided for in Civil Code, §§1951.3 and 1980 through 1991. The process requires notice to the former owner (or tenant) of his right to reclaim the abandoned property. The association must allow for recovery within 15 to 18 days of the notice (depending on how notice is given) and indicate that it may be disposed of by public auction thereafter.

The property must be left in the vacated premises or stored elsewhere during the reclamation period. After that period has passed, if the property is believed to be worth less than $700, it may be disposed of as the association sees fit. If it is worth $700 or more, it must be sold at public auction. The proceeds, after all costs are deducted, go to the county which allows the owner to claim the excess within a year.

"Lost Property." The law makes a distinction between property which is “abandoned” and that which is “lost.” Abandonment requires intent to leave the property behind. (Civ. Code §2080.7.) Without intent to abandon, the property is deemed lost and the association would follow procedures in Civil Code §2080 through 2080.10 which involve informing the owner, if known, and, if the owner is unknown and the property unclaimed, turning it over to the police or sheriff. If the police/sheriff will not accept the property, the association can follow the procedures for abandoned property described above.

Commercial Premises. Disposal of personal property from commercial premises follows procedures beginning in Civil Code §1993.

RECOMMENDATION: Because the law has specific and sometimes complicated requirements, always consult an attorney to be sure proper notices are given and procedures followed.

AIRBnB RENTALS

AIRBnB RENTALS

QUESTION: Wondering if Davis-Stirling addresses Airbnb and how associations can deal with problems created by short-term rentals.

ANSWER: No it's not addressed by the Act and yes you can do something about the problem.
Growing Problem. For those unfamiliar with Airbnb, it is a website for people to rent out their homes or even rooms on a short-term basis, whether it be a night, a weekend or a week. The service has become popular with tourists seeking lodging outside of hotels. Airbnb was founded in 2008 and in seven short years has grown to a $20 billion company with over 800,000 listings.

The problem with Airbnb short-term rentals was recently the subject of a front page article by the Los Angeles Times, "Homes as Inns Put New Pinch on Housing." The reporter observed that landlords have discovered they can make more money renting their houses a few days at a time rather than months at a time. This has led to "a whole cottage industry" that cities are struggling to regulate because of the negative impact it's had on the rental market. Long-term, stable renters have been pushed out by transient renters. Many municipalities now require short-term rentals obtain a license and pay a transient occupancy tax the same as hotels.

Impact on HOAs. Homeowner associations also suffer problems related to transient renters such as security issues, rules enforcement problems, higher maintenance costs, and increased administrative expenses because they require greater supervision. To meet the challenge, one association restricted short-term rentals and imposed a fee on landlords to offset the expenses they created.

Lawsuit. An unhappy landlord promptly sued the association over the restrictions and fees and lost. (Watts v. Oak Shores.) He appealed, and again lost. Thanks to his aggressive litigation, we now have favorable case law on the subject and he has a bill for $1.2 million in legal fees.

Published. We reported on the case three weeks ago. This past week, the court reclassified the case from unpublished to published, which means it can now be cited as case law. The court's three major rulings are significant: (i) association's have the right to restrict short-term rentals, (ii) boards can impose a reasonable fee to offset expenses associated with renters, and (iii) courts should defer to boards on decisions related to the maintenance, control and management of common areas.

Prohibiting Short-Term Rentals. If associations want to prohibit short-term rentals, they should be able to do so without the necessity of amending their CC&Rs. Most already have provisions in their CC&Rs that give them the authority they need. The first, found in many documents, prohibits owners from using their units for hotel-like operations. The second prohibits owners from running a business in the development. The third is the nuisance provision found in all governing documents. And, finally, most documents give boards broad powers to adopt rules and regulations for the benefit of the membership.

RECOMMENDATION: Associations wanting to restrict short-term rentals and/or impose fees on landlords should have legal counsel review their documents and make recommendations. To read the court's decision, see Watts v. Oak Shores.

SUSPENDING REMOTE ENTRY

SUSPENDING REMOTE ENTRY

QUESTION: Can a board deny a delinquent non-disabled owner the ability to remotely open the lobby door from his phone thereby requiring the owner to go downstairs and open the door manually for guests?

ANSWER: Yes, the privilege can be suspended. Remote entry is a privilege not a right. The delinquent owner can still escort guests to his unit--he simply loses the convenience of remote entry (since he is no longer paying for it). Make sure you hold a hearing before suspending privileges.

INSURANCE HAMMER CLAUSE

QUESTION: One of our members filed a bogus lawsuit against the board and our insurance appointed a law firm to defend us. After a year of being put through the ringer by a nutcase plaintiff and his slimy lawyer, our attorney is recommending settlement. We don't want our insurance paying him a dime. We know we can beat this guy in court. Are we in our rights to refuse settlement and demand that the case go to trial? 

ANSWER: You can refuse settlement but first you should find out if your insurance policy has a "hammer clause." If it does, you need to carefully weigh the pros and cons of continued litigation. On the plus side, if you take the case to trial and win you discourage others from filing spurious lawsuits against the association. If you lose, it could cost the association a lot of money and a special assessment.

Economics of Settling. Insurance companies don't look at who's right or wrong--they look at the economics, i.e., the cost of taking a case to trial verses the cost of settling. Not only are trials costly, there is a risk of losing. A loss could burden the insurance company with damage awards and plaintiff's attorneys' fees. to avoid the risk, they like to settle.
Hammer Clause. To ensure that boards cooperate with settlement offers, insurance carriers frequently insert a "hammer clause" in their policies. In the event a board refuses to settle and takes a case to trial and loses, the association, not the insurance company, pays the difference between the rejected settlement offer and (i) any additional legal fees incurred by the carrier, plus (ii) any judgment against the association, plus (iii) any award of legal fees against the association.

Plaintiff Refuses to Settle. Sometimes it's the nutcase plaintiff who refuses to settle. When that happens, insurance continues to pay for defending the association through trial and sometimes beyond (if the nutcase loses and files an appeal).

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.