BUYING A CONDO

BUYING A CONDO

A friend called and said his daughter was buying a condo. He asked what she should look for when buying one. Following are my recommendations.

1. Maintenance. Don't assume the association takes care of everything, it doesn't. Find out what your maintenance responsibilities are so you can budget for them. Inspect the common areas. If the paint is peeling on buildings, trees are overgrown, lawns are shabby, sidewalks are tilting--roofs and plumbing are probably in a similar condition. Poor maintenance means you can expect stagnant property values and special assessments as water starts infiltrating common areas through roofs, windows, water lines and drain lines--leading to mold and litigation.

2. Reserves. This is an extension of the maintenance issue. Does the association have healthy reserves so it can repair large ticket items? If not, special assessments are inevitable. Reserves in the 70% to 100% funding range are excellent. Reserves below 50% mean probable future special assessments. The lower the reserves, the more imminent the special assessment. If reserves are below 30%, look elsewhere for a condo.

3. Insurance. How much insurance does the association have? If it's at bare minimum levels, you face a higher risk of a special assessment in the event a claim is filed against the association. Is the development in an area deemed high-risk for an earthquake? If so, does the association carry earthquake insurance? If not, are you prepared to lose your investment in the event of significant damage?

4. Litigation. Ask the seller about litigation over the past ten years. Also ask for the past two years of minutes. A slip and fall lawsuit is not a problem. If the association has had ongoing litigation with members over the past ten years, run for the exit. The association is dysfunctional. There will be no peace until the litigants all move or die.

5. Rentals. Inquire about the percentage of rentals in the development. A high rental population creates problems for rules enforcement, maintenance and oversight of the property. If the rentals are nearing or exceed 15%, you should be cautious. If they exceed 30%, it does not matter how beautiful the condo is, you're stepping into quicksand. At 50%, the development is in a death spiral.

6. Pets. If they don't have pet restrictions, is the property a dog patch? If so, barking dogs at all hours of the day and night plus dog doo-doo in the common areas will be a challenge. If they have restrictions, do you have pets that violate those restrictions? If so, are you willing to give up your loved ones for the condo? If your Realtor tells you the rules don't matter because the association will never discover the violation, get a new Realtor.

7. Parking. Is there sufficient parking in the development? If not, it will create problems for you and your guests. Visit the property on a weekend when everyone is home and see what parking is like.

8. Noise. Ask the seller about plumbing noise, crying babies, TV and stereo sounds, etc. from surrounding units. If there is a unit above yours, ask about noise from hardwood floors. If all the above can be heard through walls and floors, it indicates cheap construction--a harbinger of future maintenance problems. It also means you won't get any sleep at night.

9. Finances. Ask for a copy of the budget and annual financial statement - and read them. Ask about delinquencies. A delinquency rate above 15% means that higher dues to make up the deficiency are probable. Also ask about past dues increases. If they proudly tell you that dues have not increased for ten years, it means they kept their dues down by deferring maintenance for ten years. It also means large increases and special assessments are looming.
10. Sales Activity. If you see a lot of "For Sale" signs in the association, you better find out why. Like rats fleeing a sinking ship, they might know something your Realtor isn't telling you.

RECOMMENDATION: It does you no good to sink your last penny into a condo and then lose it the next year when you get hit with a dues increase and large special assessment to cover delinquencies, litigation, artificially low dues and underfunded reserves. Any Realtor can read the MLS and drive you around to look at condominiums. What you need is a Realtor who is knowledgeable of how associations work and respects them. A good Realtor with condo experience will provide invaluable guidance.

SHARING HOA RECORDS & HOA FINES

SHARING HOA RECORDS

QUESTION: An owner requested over 4,000 documents which we provided. Does she have the right to share those records with others??

ANSWER: It depends on who the "others" are and for what purpose. Since all members have the right to inspect records, there is nothing improper about members sharing records with other members.

Improper Purpose. Where your homeowner can get herself into trouble is if she uses those records for an improper purpose such as (i) using them for personal gain, (ii) altering the records to defame others, (iii) selling them, or (iv) using them for any other purpose not reasonably related to her interest as a member.

Damages. If an owner uses records for an improper purpose, the association can take legal action against him and is entitled to reasonable attorneys' fees and costs if it prevails. (Civ. Code §1365.2(e)(3))

FINES & COLLECTION AGENCIES

QUESTION: Can an association turn a fine over to a collection agency if an owner refuses to pay? 

ANSWER: Only if the fine is first converted into a judgment. Since collection agencies cannot practice law, they cannot go into court to make an association's monetary penalties collectible. The association needs to first sue the owner in small claims court (up to $5,000) or superior court (over $5,000). If the court determines the fines are reasonable, the association will receive a money judgment that can then be turned over to a collection agency. Most collection agencies work on a contingency fee basis and charge between 25% and 40% on any sums recovered.

EV CHARGING STATION

QUESTION: I am a townhome owner and would like to install an EV charging station in my private garage. Do I still need HOA approval?
ANSWER: All of the owner requirements in the Davis-Stirling Act apply to installation of charging stations in common areas or exclusive use common areas. If your garage is solely owned by you as your separate property then the association arguably has no interest in the installation of a charging station in your garage.

Licensed and Insured. However, the association has an interest since your townhouse is connected to other townhouses and an improper installation could result in a fire. So as to protect your neighbors, the association has a legitimate interest in ensuring that you hire a licensed and insured contractor who installs the charging station pursuant to building codes.

MINIMUM INSURANCE LIMITS PER STATUTE

MINIMUM INSURANCE LIMITS PER STATUTE

QUESTION: To save money, can we purchase liability coverage of $1 million per occurrence with an aggregate limit of $1 million plus an umbrella policy of $1 million? An insurance agent who wants our business said this would satisfy the Davis-Stirling Act and protect owners from litigation. Our board is not convinced and would like your guidance.

ANSWER: First, a little background. Minimum insurance requirements were added to the Davis-Stirling Act after the Ruoff v. Harbor Creek decision in 1992. Ms. Ruoff, a guest of a member, suffered catastrophic injuries falling down defective common area stairs. Her husband sued the association and every owner in the association, each of whom, he argued, had common liability because they jointly owned the stairs.

The court of appeals agreed and held that every owner in the complex was jointly and severally liable for her injuries, the cost of which greatly exceeded the $1 million limit in the association's insurance policy. The case sent a chill through the industry and the Legislature responded by adding Civil Code §1365.9. The statute protects owners from individual liability, provided the association maintains at least minimum levels of insurance as follows:

• $2 million for HOAs with 100 or fewer units, and
• $3 million for HOAs with more than 100 units.

Umbrella. To answer your question, assuming your association has fewer than 100 units and assuming the $1 million umbrella is written to act as excess to the underlying $1 million general liability per occurrence, the combination of the two policies would provide the required $2 million for a single tort action brought against the association.

RECOMMENDATION: Meeting minimum levels of insurance may, however, not be enough. Even though owners are not directly liable for a loss exceeding insurance limits, they are indirectly. Assuming a $4 million judgment against an association, owners would be hit with a special assessment to make up the difference between the $2 million policy and the $4 million judgment.

Accordingly, boards need to talk to their insurance brokers to determine appropriate levels of insurance for their associations. A $5, $10 or $15 million umbrella policy is relatively inexpensive and not uncommon for associations to purchase. In addition, homeowners should individually purchase loss assessment coverage in the event a loss exceeds the association's policy limits.

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.