CHANGE IN ANNUAL DISCLOSURES FOR HOAS

CHANGE IN ANNUAL DISCLOSURES

I've been contacted by people nervous about a change in the Davis-Stirling Act's annual disclosures. Disclosures in the existing Act and the Rewrite remain largely the same; they were simply reorganized into a "Budget Report" and an "Annual Policy Statement."

Annual Budget Report. As required by Civil Code §5300(b), the new "Annual Budget Report" contains all financial-related items and must include the following:

1. A budget,
2. A summary of reserves,
3. A reserve funding plan,
4. If reserve repairs will not be undertaken for particular components, a justification for the decision,
5. If special assessments will be required to cover reserve items (with estimated amount, commencement date, and duration of the assessment),
6. How reserves will be funded,
7. Procedures used to calculate reserves,
8. Disclosure of outstanding loans, and
9. A summary of the association's insurance.

Annual Policy Statement. As required by Civil Code §5310(a), the new "Annual Policy Statement" must include the following:

1. The name and address of the person designated to receive official HOA communications,
2. A statement that members may have notices sent to up to two different addresses,
3. The location, if any, for posting a general notice,
4. Notice of a member’s option to receive general notices by individual delivery,
5. Notice of a member’s right to receive copies of meeting minutes,
6. A statement of assessment collection policies,
7. A statement describing policies in enforcing lien rights,
8. A statement describing the association’s discipline policy,
9. A summary of dispute resolution procedures,
10. Architectural approval requirements, and
11. The mailing address for overnight payment of assessments.

January 1, 2014. The new disclosure requirements do not go into effect until January 1, 2014. As long as your association's notice period falls in the 2013 calendar year, you can continue to use your existing disclosure package. What matters is the date the disclosures are mailed out, not the date they are received. Accordingly, anything mailed in 2013, including reserve studies and reserve disclosures, continue to use the existing Davis-Stirling language and Civil Code numbering scheme. Starting January 1, 2014, everyone must switch over to the new Civil Codes and language.

ELECTRONIC BALLOTING

Thanks to your letters and phone calls (over 200), Assembly Bill 1360 passed the Assembly. AB 1360 allows associations to save money by switching from paper to electronic ballots as is now done in 25 other states. I will let everyone know when it's time to start calling state senators.

Adrian Adams, Esq. Adams Kessler PLC

No on Security Deposit Interest Bill

No on security-deposit interest bill; for landlords and tenants alike: Not worth the pain for pocket change The California Apartment Association is opposing legislation that would require property owners to pay interest on tenants' security deposits. Senate Bill 603 by Sen. Mark Leno also significantly changes the penalties under current security deposit law. "SB 603 has numerous problems," CAA says in a letter to Leno. "Ultimately, the potential costs far exceed any benefit for tenants and property owners." SB 603 would require owners to pay tenants interest on security deposits at the Federal Reserve Discount rate, now set at 0.75 percent. Most banks, such as Chase or Bank of America, now offer rates for savings accounts between 0.01 and 0.05 percent.  For a $1,000 security deposit, SB 603 would require the owner to pay the tenant $7.50 in interest, even though the account may only earn 10 cents of interest per year. "Tenants in California would get better interest rates under this legislation than almost any other Californian who invests their money in a financial institution," the letter says. Moreover, the costs that owners would incur administering payments would dwarf any interest earned. On average, a $1,000 security deposit would earn 10 cents per year. But once costs including postage, paper, envelopes, forms, checks, employee time and bank fees are factored in, the property owner's cost per tenant would range from $10 to $15. In many parts of the state, though, security deposits are as low as $250-$500. As such, the potential interest earned would be almost nothing. The bill also neglects to take into consideration that many tenancies are formed between April and September, especially in college communities. As a result, rental property owners would have to "pro-rate" the calculation for the first year in February, since the tenants will not yet have a full year's interest earned. Owners could be issuing checks for 5 cents or less. With most tenancies lasting about 12 to 24 months, rental property owners would have to repeat the calculation when the resident moves out. The city of Santa Cruz offers a strong example of why SB 603 doesn't make sense. In this city, landlords are required to pay interest on security deposits to tenants, yet a recent survey of rental property owners there revealed that tenants rarely cash their checks. Perhaps it wasn't worth their trouble. With the average deposits in Santa Cruz between $500 and $750, the interest yielded for tenants only reached about 30 cents for a full year. In one case, a property manager spent $500 in processing costs to issue a total of less than $30 in security deposit interest earnings to several hundred residents. Many of these checks were uncashed, creating additional issues for the landlord in tracking checks and balancing the records. If owners and management companies follow general accounting principles, they will file IRS forms, creating a paper trail for any later audits. A bank issues a Form 1099-INT to account holders each year when interest is earned. An owner who then redistributes that interest would provide a 1099-INT to the tenant, removing the portion of interest income from the owner's books and income tax return. Otherwise, the owner would be liable to pay the tax on the interest income. For example, if an owner has six occupied units and earns 8 cents in interest from the bank for the six tenants' security deposits held, the owner would have to mail out six Form 1099-INTs, showing that $45 was paid from the landlord's own pocket to cover the higher rate required by SB 603. SB 603 also creates the potential for a negative tax consequence for tenants. Under IRS regulations, tenants must report any interest earned on their tax returns, whether they are issued an IRS Form 1099-INT or not. Given that the amount of interest is so low, it is likely that tenants will simply forget to report the income and subject themselves to IRS audits and penalties. Under SB 603, a property owner who simply forgets or does not know that he or she needs  to provide 10 cents in interest to a tenant would be considered to have done so in "bad faith," resulting in violation of the law and possibly subjecting the owner to paying twice the amount of the security deposit, plus actual damages. In addition to requiring interest payments, SB 603 removes the bad-faith requirement for penalties on the security deposit law. SB 603 would entitle every tenant whose landlord makes a mistake -- even in good faith -- to return of any portion of the deposit wrongfully withheld and a mandatory penalty that is at least the amount of the entire deposit. There is no cap on the penalty amount other than the $10,000 small claims limit. By requiring judges to award mandatory minimum penalties for a minor error, SB 603 creates a very strong incentive for every tenant to sue property owners.Any degree of victory would mean the tenant gets at least the entire deposit back, plus actual damages. Instead of increasing penalties, California landlords and tenants would be best served with legislation that clarifies Civil Code Section 1950.5. "While the author implies that landlords keep tenant's security deposits as a money-making venture, the fact is this is just not true, CAA's letter says. "The subjective nature of Civil Code 1950.5 creates unrealistic expectations on the part of tenants and continual disputes between the parties. "By now adding penalties that could be as high as $10,000 in small claims court, with absolutely no focus or acknowledgement of the problems associated with the current statute, SB 603 is unrealistic and unfair."

WHEN TO CALL A LAWYER

WHEN TO CALL A LAWYER

QUESTION: The board is wasting our money calling a lawyer for anything and everything. Our dues are already too high--does a lawyer have to be called every time someone sneezes??

ANSWER: It depends on whether its an allergy or a cold. Knowing when to call legal counsel is no easy matter for boards. There is no need to call anattorney for routine decisions. However, eliminating legal counsel altogether can backfire and subject directors to potential liability.

Personal Liability. As volunteers, directors are protected against personal liability by the Business Judgment Rule, i.e., when they perform their duties (i) in good faith, (ii) in a manner the director believes to be in the best interests of the association, and (iii) with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.
Breach of Duties. As part of their reasonable inquiry or "due diligence," boards can seek the advice of legal counsel. (Corp. Code §7231(b).) Failure to seek advice on an important legal issue that results in damage to the association could serve as the basis for an action against the board for breach of their fiduciary duties.

Following are categories of matters and events where boards should seek legal advice:

1. Amending Documents. Whenever CC&Rs and bylaws are amended or restated, legal counsel legal should be involved in drafting and recording the changes.

2. Architectural. Failure to enforce as well as arbitrary and capricious enforcement can lead to costly litigation. Whenever an architectural dispute arises, legal counsel should be called to discuss how to achieve proper resolution or to position the association for litigation.

3. Assessment Collection. Setting up proper collection policies and consistently following those policies is important to maintaining the association's finances and minimizing legal challenges.

4. Contracts. Agreements not reviewed by an attorney can have significant hidden liabilities.

5. Ethics. Whenever a director or committee member has a conflict of interest and refuses to recuse themselves, it is time to call legal counsel.

6. Injuries. Whether it be slips and falls or other types of injuries in the common areas involving residents, guests, employees, vendors or otherwise, injuries should immediately be reported to insurance and to the association's attorney so conditions can be documented and steps taken to protect against further injury.

7. Lawsuit Threatened. In addition to putting the association's insurance carrier on notice of a potential claim, boards should talk to counsel about how best to respond to the threat so as to (i) reduce the risk that a claim is actually filed, (ii) better position the association to defend itself in the event one is filed, and (iii) take the matter into ADR if appropriate.

8. Lawsuit Served. Tendering a claim to the association's insurance carrier is the first order of business. Sending a copy of the complaint to the association's attorney is the second. General counsel needs to know of the litigation so he/she can protect the association's interest in the event insurance is slow to respond or declines coverage. In addition, the board may need guidance on how to respond to the plaintiff on issues outside of the litigated matter.

9. Personnel. The most common high-risk areas are when an employee is hired, disciplined or fired. Employment litigation tends to be expensive so it is best to avoid it.

10. Recall Petition. Emotions run high in recall elections and issues of defamation often arise. Failure to properly handle a recall can lead to significant problems.

11. Request for Reasonable Accommodation. Failure to properly evaluate and respond to a request for disability accommodation can result in costly litigation.

12. Rules & Regulations. At least once, the association's rules and regulations rules should be reviewed to make sure proper fine and hearing procedures have been established and to ensure they are enforceable (and not discriminatory, such as rules against children or restrictions on who may use pools, etc.). If enforcement issues are more than routine because of the particular individuals involved or because the issues may be more complex than normal such as with architectural issues, then legal counsel should be consulted before matters deteriorate into litigation.

13. Vendor Disputes. Disputes between the association and its vendors can erupt into litigation. Legal counsel needs to analyze appropriate contract provisions, evaluate the alleged breach, and advise the board on how best to resolve the dispute.

ADDING DIRECTOR QUALIFICATIONS

ADDING DIRECTOR
QUALIFICATIONS

QUESTION: A renter was elected to the board because our bylaws are silent on who can be a director. Now we have a husband an wife who want to run for the board. We don't have time to amend our bylaws before the election, can the board simply prohibit renters and spouses in our Election Rules?

ANSWER: There is a split of opinion in the legal community on this issue.

Opinion - Boards Can Add Director Qualifications. Some attorneys believe that additional qualifications may be imposed by the board without membership approval via the rules. They argue that boards are authorized to adopt election rules and this means they can add director qualifications when they adopt or amend rules. They argue that as long as the qualifications are reasonable, they would survive legal challenge.

Opinion - Boards Cannot Restrict Candidates. In my opinion, boards cannot restrict who can run against them. Only the membership has the power to impose director qualifications. I base my opinion on the following two points:

 1. No Restrictions in the Law. The Corporations Code imposes no restrictions on who may be a director except to require that they be a natural person. (Corp. Code §5047.) The Davis-Stirling Act has no restrictions of any kind on who can serve on the board. If neither the Corporations Code nor the Davis-Stirling Act restrict candidates, I don't believe directors can limit who can run against them.

2. Inconsistent with Bylaws. Moreover, rules adopted by a board cannot be "inconsistent with governing law and the declaration, articles of incorporation or association, and bylaws of the association." (Civ. Code §1357.110(c).) This requirement is repeated in the election provisions of the Davis-Stirling Act which state that board qualifications in the election rules must be "consistent with the governing documents. (Civ. Code §1363.03(a)(3).) In my opinion, it would be inconsistent to impose restrictions in the election rules where none exist in the bylaws.

RECOMMENDATION: Since there is no consensus in the legal community and no case law to offer any guidance, boards shouldconsult their association's legal counsel on how best to handle this issue.

FUSS OVER BUDGETS

QUESTION: Is there a requirement for the board to spend no more that the budgeted amount for a particular line-item in the annual budget? If not, why all the fuss regarding establishing, approving and publishing a budget?

ANSWER: Budgets are guidelines only. They are the board's best estimate of expenses so (i) directors will know how much to assess the membership and (ii) members will know how the board arrived at that number.

Consequences. If boards were prohibited from spending more than budgeted for a particular line item, it could have significant negative consequences for an association. Theoretically it would mean that if insurance premiums went up mid-year, the board would have no choice but to allow the association's insurance to lapse. That could be disastrous.

HOA NAME CHANGE

HOA NAME CHANGE

QUESTION: If an HOA changes its name, do the original CC&Rs and bylaws still remain the governing documents even if the board has not yet paid to have them updated with the new name?

ANSWER: Yes, the documents are still valid even though they contain the old name. CC&Rs are recorded against all property in the development so they remain intact regardless of what you call the development. It is like a young lady getting married, she is still the same person and her credit card debt follows her regardless of the name change (not that she has any debt...I'm just saying it would if she did). In the same way, bylaws follow the corporation not the name. Even so, the board should be diligent about updating documents.

Loss of Name. Sometimes an association will inadvertently lose their corporate name because it was suspended for failing to file tax returns or statements of information. When that happens, it could end up with one name for the corporation and another for the development (via the CC&Rs). 

HAPPY BIRTHDAY

QUESTION: For 12 years I was able to put a Happy Birthday sign for one day on a common area. Nothing was said to me about the sign. Now I got a letter from the management company that I can no longer do that?

ANSWER: For years I rolled through a stop sign at particular intersection without being molested. One day a cop gave me a ticket. He was not sympathetic to my argument about the years of precedent I had set. He must work for your management company.

BIBLE STUDY IN UNIT

ANIMAL SACRIFICE

QUESTION: We have a tenant conducting Santeria ceremonies which include the sacrifices of goats, chickens and roosters. On trash days we have seen blood coming from trash bags running into the storm drains. What is the best way to go about stopping these practices without violating their religious freedoms?

ANSWER: Okay, those are images I don't need in my mind. For those who are unfamiliar with Santería , it is a religion similar to voodoo. It originated in Cuba and combines elements of African paganism, Roman Catholicism and ritualistic animal sacrifice. Although there are no cases involving Santería and homeowner associations, there are two cases involving cities.

Church Building. In 1993 the City of Hialeah in Florida passed an ordinance to prevent the practice of Santería in the city. The ordinance prohibited the killing of animals in a public or private ritual not for the primary purpose of food consumption. The Church of Lukumi Babalu Aye sued. Based on the First Amendment's free exercise of religion, the United States Supreme Court declared the ordinance unconstitutional and the church was allowed to conduct animal sacrifices in its church building. 

Private Residence. In 2009 the City of Euless, Texas passed an ordinance aimed at stopping the practice of Santería in a residence by prohibiting the torture and killing of animals in residential homes. The Court of Appeals ruled that Merced, a Santería priest, was acting within his Constitutional rights when he sacrificed goats and other animals as part of his home-based rituals. The court noted that home sacrifice is "a crucial aspect of Santería, without which Santería would effectively cease to exist.”

Both cases involved governmental interference with the free exercise of religion. In each case the courts found that the object of the laws was to to suppress religiously motivated conduct which is why the courts struck them down.

Homeowners Associations. Neither of the cases addressed private restrictions, such as those imposed by homeowners associations. Accordingly, it is possible that CC&R restrictions against any (not just religious) activity that causes a nuisance could withstand legal challenge. Just as private organizations can restrict free speech, they could conceivably restrict religious practices that negatively impact other members (see question below on Bible studies).

RECOMMENDATION: Because this is uncharted territory, boards should consult legal counsel when faced with these kinds of situations.

BIBLE STUDY IN UNIT

QUESTION: We have a home owner in our condo complex who holds Bible studies in his home. Is this a violation?

ANSWER: Would the same question be asked if a group of atheists got together to study the Humanist Manifesto? By itself, studying religious material does not violate anything and should not be regulated. As with animal sacrifices, boards need to look at non-religious factors.

Nuisance. The issue to examine is one of nuisance. Sacrificing animals in a condo can be quite disruptive to the quiet enjoyment of other members who have to listen to screaming animals meeting an untimely death. Moreover, ritualistic sacrifice may create unsanitary conditions (such as blood leaking from trash bags into the common areas).

A Bible study, on the other hand, is no different than friends getting together to play cards or a book club discussing the latest best seller. If, however, the Bible study turns disruptive from a pounding piano and loud singing together with parking problems from illegally parked vehicles, then nuisance becomes an issue. In the scenario I described, the nuisance needs to be more than mere inconvenience, it needs to be significantly disruptive to convince a judge that injunctive relief is warranted (following appropriate violation hearings, fines, IDR and ADR).

Reading Material. The bottom line is the motivation for taking action against the Bible study. Is it because religious material is being studied? No judge is going to allow an association to regulate what people read. 

ANT INVASION

QUESTION: I have ants that come up through the foundation of my unit. The board has a pest control that sprays the complex twice a month, and has paid for an inspection of my unit. Who pays for my unit to be treated for ants that come in through the foundation? The board said it is a homeowner expense since the ants are not in the structure or common area. 

ANSWER: I side with the board on this one.

FEEDBACK

Service Animal #1. I had to laugh at your distinction of a “service animal” vs. a “companion” animal. As a new owner of a 15-week old pup, it is evident that my little companion has no special training; but I have to say… this lack of training GIVES me anxiety!! -Cyndi B.

Service Animal #2. Can a HOA prohibit ANY pets from pool area? From swimming in the pool? -Charlie H.

RESPONSE: Associations can prohibit animals from pool areas EXCEPT service animals. If someone is blind and needs their guide dog to safely maneuver to a lounge chair, the association cannot prohibit the dog. Swimming is a different matter. From my review of applicable laws, it appears that service animals can be prohibited from entering the water for health and safety reasons. However, there may be an exception if the service animal has been trained to perform a specific task essential to its disabled owner's use of the pool and the animal does not pose a threat to the health and safety to others or to the sanitary conditions of the pool. Then it is possible that reasonable accommodation could be required. You should get a legal opinion from your attorney on this issue.

Service Animal #3. People with diagnosed depression can and often do have service dogs who provide emotional support. The key word here is "diagnosed." Some people can claim they suffer from depression even when there has been no diagnosis. So, they could try to have a dog where one is not allowed using the alleged depression as a subterfuge. A companion dog for a person suffering from depression should undergo obedience training even though the type of service the dog renders is not obvious, i.e. the person is sighted. Training can be obtained at a reasonable cost from some of the major pet supplies retailers such as Petsmart. -John A.

Service Animals #4. Service dogs are not just for physical disabilities, the ADA now includes psychiatric disabilities. The revised definition became effective March 15, 2011: "Service animals are defined as dogs that are individually trained to do work or perform tasks for people with disabilities. Examples of such work or tasks include guiding people who are blind, alerting people who are deaf, pulling a wheelchair, alerting and protecting a person who is having a seizure, reminding a person with mental illness to take prescribed medications, calming a person with Post Traumatic Stress Disorder (PTSD) during an anxiety attack, or performing other duties. Service animals are working animals, not pets. The work or task a dog has been trained to provide must be directly related to the person’s disability. Dogs whose sole function is to provide comfort or emotional support do not qualify as service animals under the ADA." -Kelly M.

SERVICE & COMPANION ANIMALS

SERVICE & COMPANION ANIMALS

Service animals and comfort animals are not the same. A "service animal" is one specially trained to assist the disabled retrieve objects, open doors, guide the blind, etc. A "companion" animal has no special training but provides emotional support to relieve anxiety and depression.

Widely Abused. Both service and companion animals are invaluable to the disabled. Unfortunately, the perfectly fit have abused disability rights to get around pet restrictions. The subterfuge starts by persuading their doctor to write a letter that the disallowed animal is necessary to their patient's health. The person then goes on the internet and pays a certificate mill to "certify" that their dog is a service animal. For a few dollars more, they can receive special dog tags and other paraphernalia for their newly minted service animal. And voila, their pet is exempt from the association's restrictions. A recent case in Florida addressed this practice.

Florida Case. The Sun Harbor HOA prohibited dogs. One member, Vincent Bonura, invited his fiancee to move in with him and she brought her dog in violation of the association's restriction. The association sent a violation letter and Bonura lied about having a dog. He later admitted to it but then claimed it was a registered service animal necessary for his fiancee's disability. He provided the association with a certificate he purchased on the internet.

The association was skeptical and requested evidence that his fiancee suffered from a handicap and asked what special training the dog had received to accommodate her handicap. Bonura ignored the board and litigation ensued. At trial, the fiancee's newly hired psychiatrist testified that he believed the dog helped her anxiety and depression. When the court ruled for Bonura, the association appealed.

Reversal. The court of appeals reversed. The justices noted that federal courts have long recognized that,

[T]he duty to make a reasonable accommodation does not simply spring from the fact that the handicapped person wants such an accommodation made. Defendants must instead have been given an opportunity to make a final decision with respect to Plaintiffs' request, which necessarily includes the ability to conduct a meaningful review of the requested accommodation to determine if such an accommodation is required by law.

The court found that Bounura had refused to comply with the association's request for reasonable documentation of his fiancee's disability and the need for a service dog. Even more problematic for Bonura, testimony failed to establish that his fiancee suffered from a disability.

Reviewing the record, there was no competent, substantial evidence indicating any substantial limitation on one or more of Ms. Vidoni's major life activities. In fact, the testimony indicated Ms. Vidoni was able to travel and work without the dog. Along those same lines, the evidence also failed to establish the necessity of the accommodation. Ms. Vidoni admitted that she was not as dependent on the dog as she had been originally and she could be independent of the dog at times including for work. (Sun Harbor v. Bonura.)

RECOMMENDATION: Even though Florida HOAs are allowed to prohibit pets, California has effectively ended the practice. Even so, California allows for reasonable pet restrictions (weight limitations, number limitations, etc.). When faced with a request for accommodation for a nonconforming pet, associations should consult legal counsel.

PAINT COLORS

QUESTION: Our HOA requires homeowners receive approval from an architectural committee before painting their homes. The committee does not have any standards for reviewing paint colors. Can they deny a color simply because they don't like it?

ANSWER: Yes they can reject a paint color simply because they don't like it. That is precisely why an architectural committee exists--to make aesthetic decisions about what is appropriate for the community and what is not.

Another important function of the Association is to preserve the aesthetic quality and property values within the community. (Cohen v. Kite Hill.)

Maintaining a consistent and harmonious neighborhood character, one that is architecturally and artistically pleasing, confers a benefit on the homeowners by maintaining the value of their properties. (Dolan-King v. Rancho Santa Fe.)

Written Standards. Not having written standards, however, is a problem. It leads to discord and potential litigation because members jump to the conclusion that they are somehow being discriminated against if their request is denied. If the committee were to adopt written standards, applicants would know what colors to choose from and would submit a conforming color, thereby avoiding rejection.

Disapproval Requirements. Per the Davis-Stirling Act, any decision by the architectural committee must be in writing. If a proposed change is disapproved, the committee's decision must include both an explanation of why the proposed change is disapproved and a description of the procedure for reconsideration of the decision.

RECOMMENDATION: All associations should adopt clearly defined architectural standards. Once adopted, enforcement of those standards must be in good faith and not arbitrary or capricious.