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JUSTIFIED EXPENDITURES

Q. 
Can the board of directors of our association spend association funds on what amounts to a political issue? The board wants to spend funds to stop a nearby development, based on the belief that it will harm the value of homes in our community.

A. 
Absent a prohibition in the association’s bylaws or CC&Rs, the board can probably justify the expenditure so long as they act:

1.      In good faith;

2.      In the best interest of the association;

3.      After becoming fully informed, and

4.      After deliberating as a body before deciding. Top


SPECIAL MEETINGS

Q. 
Who can call for a special meeting of the members of a homeowners association?

A. 
A special meeting can be called by the board, the chairman of the board, the president, or any group of members, consisting of at least five percent. Top


VOTING BY PRESIDENT OF BOARD

Q. 
Historically, the President of our homeowner association board has voted only to break ties.  Is this procedure required by law?

A. 
No.  The President of your board may vote on any matter unless prohibited by your bylaws.  This is possible, but it would be highly unusual. Top


RECUSAL BY BOARD MEMBER

Q. 
When is it appropriate for a member of our homeowner association board to recuse himself?

A. 
A board member should recuse or disqualify himself or herself because of self interest, bias or prejudice.  If a board member does not recuse himself or herself when required, he or she will have a conflict of interest.  If a board member votes on a matter where he or she has a conflict of interest, he or she violates his or her fiduciary duty. Top


ELIGIBILITY TO SERVE ON BOARD

Q. 
I own a townhome, however, I don’t reside in it. Am I still eligible to be a member of the board of directors?

A. 
It depends upon your bylaws. Some bylaws permit non-resident owners to be members of the board. Some do not. There is nothing in the California Corporations Code to prohibit you from being a member. Top


CHRISTMAS LIGHTS

Q. 
Our homeowners association has a restriction against members attaching anything, including lighting, to the common area.  The common area includes the roofs and exteriors of the buildings.  We interpret this to mean that members cannot attach Christmas lights to the exteriors of their townhomes.  Can the board make an exception to the restriction so members can put up their lights?

A. 
I believe your board will be safe in making a temporary exception to the restriction, however, don’t be shocked if someone complains.

Any rule concerning Christmas lights should include the following:

1)      The first date they may be installed,

2)      The last date for their removal,

3)      Any limits on the number of lights permitted (if applicable),

4)      The type of hardware permitted to be used for installation, and

5)      Any daily fine to be imposed if the lights are not removed on time. Top


BOARD REFUSES TO ENFORCE CC&Rs

Q. 
I live in a zero-lot-line homeowner association in Simi Valley, where the CC&Rs (Covenants, Conditions and Restrictions) make the association responsible for exterior stucco repairs and maintenance except for situations where a member of the association has caused the damage. Each member of the association is responsible for interior repairs.

My neighbor has planted ivy in her yard which has attached itself to the exterior of my townhome in an area where only my neighbor has access. I am concerned that the ivy will eventually damage the stucco leading to water intrusion and interior damage. The board of directors seems to be reluctant to request that my neighbor remove the ivy. What should I do?

A. 
You should advise your board of directors in writing of their obligation as set forth in your CC & Rs . Specifically, you should point out that the board should either require your neighbor to remove the ivy, or agree to recommend to the full membership , a proposed amendment to the CC & Rs that would require the association to make both exterior and interior repairs caused by exterior plants.

It is highly unlikely that your board will choose to amend the CC & Rs as such. It is more likely that they will agree to request the removal of the ivy.

If the board fails to do anything, you probably will have documented your file sufficiently to hold the association responsible if damage takes place in the future. Also, to be safe, I recommend that you send copies of your correspondence to any new members who join the board at a later date. Top


RIGHT TO PRIVACY

Q. 
I am on the board of directors of my homeowners association in Long Beach. May the board discuss individual delinquencies (identifying names) at regular board meetings? The association's law firm has advised us that we may do so. I do not feel comfortable in having these types of matters discussed in public. What is your opinion?

A. 
Discussions concerning individual delinquencies (identifying names) should only take place during executive sessions. This means that members of the association will not be present other than board members. The California Civil Code requires that the board of directors must adjourn to executive session to consider litigation and member discipline.

The California Constitution guarantees the right to privacy. While it is unclear whether the Constitution protects a person from an invasion of privacy by a homeowners association (as opposed to the state), it may. The right to privacy has been liberally interpreted by all courts. Lastly, the intrusion into private affairs by an individual may constitute a court for which the plaintiff may collect damages including punitive damages.

I strongly disagree with your counsel's opinion and suggest that your board discuss association delinquencies only during executive committee sessions. Top


HIRING CONTRACTORS

Q. 
We live in a common interest development in Artesia. Based on the recommendation of our management company, our board of directors obtained three bids for landscaping maintenance and then selected the company with the highest bid. The bids were for identical work. Since all three companies were proposing to do the same work, shouldn’t our board have selected the lowest bid? Our monthly assessments are already too high and many of us live on fixed incomes.

A. 
The board should use its best judgment in deciding which company to use, based on all facts available. This is their legal duty. While the three companies may have submitted bids for the same work, it does not logically follow that all three companies will provide the same quality of work. Sometimes experience is helpful in determining which company will provide the highest quality work and, likewise, who will be the most reliable contractor. One of the advantages of hiring an established local management company, is that they have experience with contractors and can provide valuable recommendations to the board of directors. Top


REMOVAL OF TREES BY BOARD

Q. 
Our homeowners association in Burbank consists of twelve townhomes.  We have a three person board which includes two members who live off-site.  The two off-site board members just voted as a majority to remove several beautiful, twenty-five year old trees because they want to save money on tree trimming.  The ten members of the association who live on-site are furious about the decision.  The trees are being removed within a week.  Is there anything we can do?

A. 
If the board of directors has a good reason, in their reasonable judgment, to remove the trees, they may do so.

While I recommend that you present a petition signed by the ten members to your board in order to influence their decision, they may legally exercise their reasonable judgment and remove the trees.

This situation illustrates the critical importance of electing board members who will represent the majority of members.  Members of associations should take the subject of board elections very seriously. Top


BOARD REFUSES TO SUE DEVELOPER

Q. 
I live in a large condominium community with extensive common areas. The community is only two years old. While we have several serious construction defects, the board refuses to sue the developer because they want to avoid litigation and would rather special assess to repair the defects. Do I, as a member of the association, have the right to sue the developer for these defects?

A. 
Yes. As a member of a condominium association, you have standing to file suit. You should immediately consult with a construction defect attorney concerning your rights because they can be lost if you delay taking action. Top


DISCLOSURE OF DELINQUENCY TO MEMBERSHIP

Q. 
Is there ever a time when it is appropriate for the board of directors of a homeowners association to inform the membership of a serious delinquency in the payment of monthly assessments?

A. 
Yes. A board may disclose a delinquency when its collection action has reached the stage of a lawsuit. When an association becomes involved in litigation, the members are entitled to notice. The filing of a suit places the matter in the public domain and is material to the financial condition of the association. California Civil Code Section 47 protects the association as plaintiff from liability for defamation or disclosure of private information under the "litigation privilege." Top


WAIVING LATE FEES

Q. 
Our board of directors recently waived a late fee for a board member because "she puts in so much free time." Other members of the association are required to pay a late fee whenever they pay late, without exception. What are your comments?

A. 
I strongly recommend that the board cease the policy of waiving late fees for this or any other board member because such a policy creates a legal defense for other members of the association who pay late fees and get fined. If the board ignores my advice, at the very minimum, the board member who is receiving the special benefit should be recused from voting on such a waiver. Lastly, the receipt of such a benefit may have the legal effect of eliminating the board member's statutory protection because it can be argued that volunteers do not receive compensation, and that the waiver of a fee is in fact compensation. In short, it's asking for trouble to make exceptions such as the one described. Top


FAILURE TO HOLD ANNUAL MEETING

Q. 
The board of directors of our homeowners association has not held an annual meeting to elect new directors for more than 18 months even though our bylaws require an annual meeting to be held. I have requested that our "annual" meeting be held, but have been ignored. What can I do?

A. 
If a corporation with members is required by its bylaws to hold a regular meeting and fails to do so for a period of sixty days after the date designated, or if no date has been designated, for a period of fifteen months after its last regular meeting, the superior court of the county may summarily order a meeting to be held upon application of a member after notice to the board giving it an opportunity to be heard. Top


QUESTION ABOUT POTENTIAL BOARD MEMBER

Q. 
A member of our homeowner association who is running for the board has been chronically late in paying her monthly assessments.  She has had every excuse under the sun but is now paid up.  Other than the chronic delinquencies, she is bright, knowledgeable and seems to work hard.  What do you think?

A. 
Members of an association who have consistently paid their assessments late, are generally not ideal board members.  You should ask the following questions before you vote for her:

Will she retaliate against the board and / or management company because she has been required to pay late fees and collection costs?  This is a common problem.

Will she attempt to liberalize the association's collection policy to make it easier for members who don't pay on time?  This is also a common problem.

Will she vote unreasonably against every proposed increase in monthly assessments because she is having financial problems?  Likewise, this is a common problem.

I strongly recommend that you elect board members who are "model citizens" to the extent possible.  Top


NON-OWNER DIRECTORS

Q. 
I own a townhome, however, I don't reside in it. Am I still eligible to be a member of the board of directors?

A. 
It depends upon your bylaws. Some bylaws permit non-resident owners to be members of the board. Some do not. There is nothing in the California Corporations Code to prohibit you from being a member. Top


LIABILITY PROTECTION OF BOARD MEMBERS

Q. 
I am considering running for election to the board of directors of my homeowners association. What types of protections are available to protect me against legal liability for negligent acts?

A. 
Under the California Civil Code, a director cannot be held personally liable if the director is acting:

(1) As a volunteer (not paid);

(2) Within the scope of the director's authority;

(3) In good faith;

(4) In the absence of willful, wanton or gross negligence; and

(5) The association has both general liability and directors/officers liability insurance coverage ($500,000 minimum for 100 units or less, or $1,000,000 minimum if over 100 units).

Not withstanding the above, the association may be held liable for negligent acts of the board of directors.

In addition, the California Corporations Code also provides immunity if the director is acting:

(1) In good faith,

(2) In the best interest of the corporation,

(3) In accordance with the business judgment rule, and

(4) As a volunteer (not paid).

Immunities are not absolute. You should contact legal counsel for additional information and obtain comprehensive insurance coverage from a knowledgeable insurance broker. Top


PREPARING TO BE A DIRECTOR

Q. 
I was recently elected to the board of directors of my homeowner association in Agoura Hills, and am somewhat at a loss as to how I can best prepare for my responsibilities.  Can you provide me with a list of what I should do?

A. 
I suggest the following:

First, read the following:

1)      Bylaws of the association;
2)      CC&Rs (Covenants, Conditions and Restrictions);
3)      Rules (if applicable);
4)      Contract with management company;
5)      Latest reserve study;
6)      Most recent budget;
7)      Minutes of board meetings for the last twelve months;
8)      Minutes of the last annual meeting of owners (members);
9)      Monthly financial reports for the last twelve months;
10)    Insurance policy(ies) of the association; and
11)  Management company inspection reports for the last twelve months.

Your management company should provide you with any of the items listed that you need.

Ask your management company representative to provide you with an update, along with current legal compliance schedule for associations.  Review their web site for possible helpful information.

Ask you association attorney for an update, if any legal matters are pending.  Review their web site for possible helpful information.  Normally, a law firm will not charge for such an update. Top


NEGLIGENCE OF BOARD

Q. 
During the recent rains, the roof to my condominium leaked through a crack causing damage to my furniture and other personal property. I have been informed by the association's insurance company that the master policy excludes coverage for my personal property. I don't have insurance. Can the association be held liable for not maintaining the roof?

A. 
Possibly. If the board of directors fell below the standard of care in maintaining the roof, they could be liable for negligence and would then be responsible for paying your damages. The fact that the roof leaked is insufficient, by itself, to prove negligence on the part of the board. For example, if the crack was new, the board would probably not be held liable for negligence. If the crack was old and the board failed to have the roof inspected, it would be more likely that a court would hold them liable. The facts of your case must be fully investigated before an educated opinion can be offered.

The lesson is clear. It is prudent for all condominium owners to obtain insurance to protect their property. It is inexpensive compared to the risk of harm an owner can suffer. Top


SELF-MANAGED ASSOCIATIONS

Q. 
Our association in Artesia, which consists of twelve townhomes, has been self-managed for many years in order to save money. Our newly elected board of directors is considering the possibility of hiring a management company which would result in an increase of our monthly assessments. The board claims that we should save money in the long run. What is your experience?

A. 
In my experience, I have found that self-managed associations have higher expenses in the long run than those with professional management. Overall, self-managed associations pay more for maintenance and repairs, have more collection problems and pay out more legal fees because more mistakes tend to be made by the boards of these associations. Self-managed associations tend to keep many lawyers working overtime. Top


DISCLOSURE OF LITIGATION

Q. 
Is there ever a time when it is appropriate for the board of directors of a homeowners association to inform the membership of a serious delinquency in the payment of monthly assessments?

A. 
Yes. A board may disclose a delinquency when its collection action has reached the stage of a lawsuit. When an association becomes involved in litigation, the members are entitled to notice. The filing of a suit places the matter in the public domain and is material to the financial condition of the association. California Civil Code Section 47 protects the association as plaintiff from liability for defamation or disclosure of private information under the "litigation privilege." Top


WHEN DOES A CONFLICT EXIST?

Q. 
Please define "conflict of interest."

A. 
A conflict of interest exists where an individual's duty to one party leads to the disregard of a duty to another. It exists when an outside influence affects a person's ability to make an independent, unimpeded, objective decision or when a person owes duties to separate parties with conflicting interests.

Whether or not a conflict of interest exists depends on the facts of a particular situation which must be evaluated on a case-by-case basis. Top


BOARD REFUSES TO OBTAIN RESERVE STUDY

Q. 
Our board of directors refuses to obtain a reserve study for our homeowner association. Can board members be held legally liable for negligence if they won't obtain a reserve-study?

A. 
Yes. Negligence is a civil wrong (tort) that has the following elements:

          (1) The defendant must owe a legal duty to conform to a certain standard of care for the protection of the plaintiff,

          (2) The defendant must have breached his duty by failing to conform his conduct to the required conduct,

          (3) The breach must be a legal cause of the plaintiff's injury, and

          (4) The plaintiff must have suffered actual harm.

The California Civil Code, with few exceptions, requires the board of directors of an association to obtain or prepare a reserve study at least once every three years. Whenever a board is required by law to do something, it owes a legal duty to act accordingly. Failing to obtain or prepare a legally required reserve study constitutes a clear breach of duty. If such a breach causes harm to members of the association, the legal elements of negligence have been satisfied and the members may successfully prevail in a suit.

Failure to obtain a serve study can result in any one or more of the following types of harm:

          (1) It may result in a large special assessment being imposed which some members of the association may find difficult or impossible to pay.

          (2) A member of the association may find it difficult to sell or refinance his or her home which may cost money or even result in a foreclosure. Buyers and lenders are becoming more knowledgeable and are often refusing to become involved with associations that do not comply with the law.

          (3) Owners may suffer the consequences of being a member of an association involved as a defendant in litigation brought by another member. Top


LEGAL PROTECTIONS FOR BOARD MEMBERS

Q. 
I am considering running for election to the board of directors of my homeowners association. What types of protections are available to protect me against legal liability for negligent acts?

A. 
Under the California Civil Code, a director cannot be held personally liable if the director is acting:

          (1) As a volunteer (not paid);

          (2) Within the scope of the director's authority;

          (3) In good faith;

          (4) In the absence of willful, wanton or gross negligence; and

          (5) The association has both general liability and directors/officers liability insurance coverage ($500,000 minimum for 100 units or less, or $1,000,000 minimum if over 100 units).

Not withstanding the above, the association may be held liable for negligent acts of the board of directors.

In addition, the California Corporations Code also provides immunity if the director is acting:

          (1) In good faith,

          (2) In the best interest of the corporation,

          (3) In accordance with the business judgment rule, and

          (4) As a volunteer (not paid).

Immunities are not absolute. You should contact legal counsel for additional information and obtain comprehensive insurance coverage from a knowledgeable insurance broker. Top


BOARD MEETINGS BY E-MAIL

Q. 
May our board meetings be held by email communication?

A. 
No. Members of the board may participate in a meeting through the use of a conference telephone or similar communications equipment, so long as all members participating in the meeting can hear one another. It is necessary that board members be able to confer with each other in order to comply with their legal duties. Top


RECALL OF BOARD

Q. 
What are the most common reasons that boards of Directors of homeowner associations are recalled?

A. 
The most common reasons for recalls are:

(1) The board violates or has violated the law;

(2) The board has failed to operate within the business judgment rule (See Corp.  Code Section 7231);

(3) They fail to plan ahead, resulting in large special assessments;

(4) board members act in an autocratic, arrogant, and secretive manner;

(5) Deferred maintenance has been allowed, resulting in lower property values and the potential for special assessments;

(6) They refuse to enforce the CC&Rs and/or Rules;

(7) The board refuses to permit members of the association to adequately address issues at board meetings;

(8) They fail to treat all members equally;

(9) The board misuses "executive session"; and

(10) The board's collection policy is either too harsh or too lenient. Top


PROCEDURE FOR RECALL

Q. 
The majority of homeowners in our association are outraged by the conduct of our board of directors.  The next election won't be held for another eight months.  Our bylaws are silent on the subject of recalling the board. What can we do?

A. 
The California Corporations Code sets forth the procedure for recalling a board of directors.  It involves calling for a special meeting, sending out proxies and then voting.  An association attorney can assist you with the details. Top


PARLIAMENTARY PROCEDURES

Q. 
Our homeowner association bylaws require that we adopt a system of Parliamentary Procedure. What is Parliamentary Procedure and what is its purpose as it relates to a homeowner association?

A. 
Parliamentary Procedure is a set of rules of order. Following is one of the basic rules:

All members have equal rights, privileges and obligations which are to be ensured by the chairperson;

To learn more of the basic rules, consult with an Attorney who specializes in HOAs. Top


REQUIREMENT OF MINUTES

Q. 
Is the board of directors of our association required to keep minutes of meetings?

A. 
Yes. The corporations code requires associations to keep minutes of meetings of the board of directors. However, the corporations code does not require the board to keep minutes of executive sessions. Any matter discussed in executive session must be generally noted in the minutes of the board of directors. Top


WAIVING RESERVE STUDY

Q. 
We live in a small homeowners association in Burbank. Can our board of directors waive the legal requirement for a reserve study?

A. 
No. Top


BOARD REFUSES TO REPIPE BUILDING

Q. 
Our condominium building in Los Angeles has old galvanized pipes that have been leaking for several years. The board makes repairs, but has refused to repipe the building because our reserves are inadequate. What is their legal duty?

A. 
The board should borrow the funds to repipe the building if possible. If a loan is not available, the board should immediately begin the process of increasing assessments so the work can be done at the earliest possible time.

Given that the board has knowledge of the deteriorating pipes, the association will probably be liable for the total cost of all repairs resulting from future leaks. Repiping will cut off the association's liability. Top


PIPE REPAIRS COVERED BY INSURANCE

Q. 
Will the association's insurance policy cover the cost of repairs resulting from the leaking of our building's old galvanized pipes?

A. 
Most insurance policies will not pay for such damage if it determines that the board knew of the deteriorating pipes and failed to replace them. Insurance policies generally cover only sudden, unexpected losses. Losses from old deteriorating galvanized pipes are expected. Top


RECORDING VOTES

Q. 
When the board of our condominium association votes, is it required that the minutes record how each member voted?

A. 
No. It is sufficient for boards to record only whether the directors voted for or against a particular motion. However, any individual director may require that his or her vote on a particular matter be recorded in the minutes. Top


EMERGENCY MEETINGS

Q. 
Who can call an emergency board meeting?

A. 
The president of the board or any two directors other than the president. A notice and agenda are required even though less than four days notice is provided. Members can attend emergency board meetings excluding executive sessions. Top


VIOLENCE AT BOARD MEETINGS

Q. 
We recently had an incident at a board meeting where one member pushed another. Can we install a video camera in our community room and record our board meetings on video tape?

A. 
Yes. Installing cameras and recording the meetings is likely to deter such future conducts. Top


BORROWING M0NEY

Q. 
Can the board of our homeowner association borrow funds from a bank for our association?

A. 
The authority for associations to borrow money is found in the association’s governing documents. Absent any limitations in the governing documents, associations can borrow money if approved by the board of directors. Top


SUSPENDED CORPORATION

Q. 
Our Association’s management company recently informed the board that the corporate status of the association had been suspended. How does a homeowner association become suspended and what are the consequences?

A. 
Possible reasons for suspension are:

Failure to pay taxes,
Failure to file taxes,
Failure to file a Statement by Domestic Nonprofit Corporation, or
Failure to file a Statement by Common Interest Development.

The consequences include the loss of:

The right to bring and defend lawsuits,
The right to collect assessments,
The right to enforce contracts with contractors and vendors, and
The right to enter into contracts.

A suspended corporation (association) can be revived. When this occurs, a Notice of Revivor is provided by the Secretary of State. Top


NEGLIGENCE OF BOARD

Q. 
Our board of directors refuses to obtain a reserve study for our homeowner association. Can board members be held legally liable for negligence if they won't obtain a reserve-study?

A. 
Yes. Negligence is a civil wrong (tort) that has the following elements:

          (1) The defendant must owe a legal duty to conform to a certain standard of care for the protection of the plaintiff,

          (2) The defendant must have breached his duty by failing to conform his conduct to the required conduct,

          (3) The breach must be a legal cause of the plaintiff's injury, and

          (4) The plaintiff must have suffered actual harm.

The California Civil Code, with few exceptions, requires the board of directors of an association to obtain or prepare a reserve study at least once every three years. Whenever a board is required by law to do something, it owes a legal duty to act accordingly. Failing to obtain or prepare a legally required reserve study constitutes a clear breach of duty. If such a breach causes harm to members of the association, the legal elements of negligence have been satisfied and the members may successfully prevail in a suit.

Failure to obtain a serve study can result in any one or more of the following types of harm:

          (1) It may result in a large special assessment being imposed which some members of the association may find difficult or impossible to pay.

          (2) A member of the association may find it difficult to sell or refinance his or her home which may cost money or even result in a foreclosure. Buyers and lenders are becoming more knowledgeable and are often refusing to become involved with associations that do not comply with the law.

          (3) Owners may suffer the consequences of being a member of an association involved as a defendant in litigation brought by another member. Top


AGENT FOR SERVICE

Q. 
Due to no fault of our association board, we have had several management companies over the last few years. As a result, there has been confusion over who is the agent for service of process. We want to avoid this problem in the future. Any suggestions?

A. 
Many law firms will provide corporations, including non – profit mutual benefit corporations, with the service of being the legally designated agent for service of process for a nominal cost. Using a law firm avoids the risk that the association will be sued and a default entered for failing to respond on a timely basis.Top


BUDGET FOR LEGAL FEES

Q. 
How do you recommend that our association budget for legal fees and costs?

A. 
Your board should start by getting a recommendation from the association’s legal counsel. The attorney will want to review your association’s annual legal expenditures for the last five to seven years and will want to discuss the status of your collections and other factors. Most HOA attorneys will provide this service at no cost to the association.Top


ELECTING A CONVICTED FELON

Q. 
A convicted felon was recently elected to our board and made treasurer. The board believes he has paid his debt and has learned a lesson. They claim he is now a model citizen. Many owners are very concerned. What are your thoughts?

A. 
It is not illegal to elect a convicted felon to the board of an association and it is not illegal to make the person treasurer. Notwithstanding, the fact should be disclosed in writing to your association’s directors and officers liability insurance carrier to determine whether they will cancel or not renew the policy if the individual continues to serve. In addition, if you have coverage for dishonest acts, you may run into the same problem. I believe it is a matter of poor judgment to elect this individual to the board and then make him the treasurer. Top


LOT OWNED BY CORPORATION

Q. 
If a lot is owned by a corporation, may the corporation send a representative to attend board meetings?

A. 
Yes. In fact, the corporation can designate a person to run for the board if it wants to do so. Top


INSPECTION OF ELECTIONS REQUIRED

Q. 
Many of the members of our homeowners association don't trust the board to accurately count the ballots at our next annual meeting. Do you have any suggestions?

A. 
Yes. The California Corporations Code sets forth a procedure for appointing "inspectors of election."

Prior to any meeting of members, the board may appoint inspectors of election to act at the meeting. If inspectors of election are not so appointed, the chairman of the meeting may, and on the request of any member, appoint inspectors of election at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more members, the majority of the members represented in person or by proxy shall determine whether one or three inspectors are to be appointed.

The inspectors of election shall determine the number of memberships outstanding and the voting power of each, the number represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies, and do such acts as may be proper to conduct the election or vote with fairness to all members. Top


DEVELOPMENT OF BUDGETS

Q. 
What are the most common errors made by homeowner association boards and management companies when preparing their HOA budgets?

A. 
Following are the most common budget errors:

Not including a realistic allowance for bad debts. This requires evaluating current receivables and examining historical financial data;
   
Updating the association's calculation of reserve contributions;
   
Omitting a contingency factor line item of 3% to 5%;
   
Making the assumption that every item in last year’s budget should be the starting point for next year's budget. The prior year budget must be evaluated line by line;
   
Failing to recognize that insured claims require the payment of the deductible which must be included in the budget;
   
Not recognizing that some homeowner claims, such as water intrusion from the common areas, may not be covered by insurance. These types of claims may include interior damage to personal property for which the HOA may have liability;
   
Omitting an allowance for legal fees to cover the cost of legal advice for the board;
   
Deciding to defer necessary maintenance into the future in order to minimize the monthly assessments. This is likely to cost the members of the association far more in the long run;
   
Making the political decision not to increase the budget when reality requires an increase; and
   
Deciding to make future special assessments instead of increasing the regular monthly assessments.
  Top

 


NOT REGULATED BY DAVIS-STIRLING

Q. 
Our homeowners association in Los Angeles is incorporated, but has absolutely no common area. Are we still regulated by the Davis-Stirling Act?

A. 
No. You are regulated primarily by your CC&Rs and the California Corporations Code. Top


CONDOMINIUM UNIT ABOVE LEAKS

Q. 
The condominium above ours has a defective shower pan that leaks into our home. Our management company insists that we must deal directly with the person above us and will offer no assistance. Their position is that the association has no power to act. Are they correct, or should they take action to force the owner with the leaking pan to repair it?

A. 
Your association has the power to act whenever common area property is being damaged by a member of the association. If the defective shower pan is allowing water to wet the internal structure of the building (common area), it may cause dry rot, electrical problems, or other damage. Thus, the association has the power to act.

If your management company and association will not provide you with assistance, you may take legal action yourself. Before filing a suit against your neighbor, your attorney should review your CC&Rs. If a claim can be brought for the enforcement of the CC&Rs, you may be entitled to recovery of legal fees. Top


SUSPENSION OF ASSOCIATION

Q. 
How can I determine if my homeowner association has been suspended by the California Secretary of State?

A. 
First, go to the California Secretary of State website: www.sos.ca.gov. Then click on the “Business Entities” button. Next, click on “California Business Search”. Type the exact name of your association into the “corporations search bar” and click on search. The exact name will be found in the bylaws. When the name comes up on the screen, click on it. The "status" will indicate either active or suspended.  Top


HOA SUSPENSION

Q. 
What happens if our homeowners association has been suspended by the Secretary of State?

A. 
This is a serious problem. Most importantly, your association may not be able to defend itself in court or use the courts to assert its rights. There are also fines to pay and other legal consequences. You should have your association attorney or CPA resolve any deficiencies and most importantly, determine the reason for the suspension. Usually, suspensions result from the failure to file tax returns or other required forms. If your management company is solely at fault, it should pay any fines and costs.  Top


UNINCORPORATED HOA

Q. 
Our association in Santa Monica is not incorporated. Do you recommend that we incorporate?

A. 
Yes. The cost is relatively small and incorporation will reduce the association's liability. There is a long history of case law which provides protections and procedural guidelines that do not apply to unincorporated associations.  Top


FINANCIAL STATEMENT REQUESTED

Q. 
I own a townhome in Santa Monica, but am not on the board of directors. While attending a recent board meeting, I asked our management company representative for a current financial statement. My request was denied and I was told that I am only entitled to a year-end report. Is this correct?

A. 
No. California law requires a board of directors to provide every member with a year-end financial report but it does not preclude you from receiving interim reports. You are entitled to a monthly report, less the member delinquency report, but will be required to pay the cost of duplication. You are also permitted to inspect association records for any association related purpose.  Top


DECISION TO HIRE MANAGEMENT COMPANY

Q. 
Does the membership of our condominium association have the power to decide whether to hire a management company, or can the board of directors make this decision? Our board wants to hire a management company, but many members of the association want to remain self-managed. Our condominium association has only 21 homes. The cost of management would be $400 per month.

A. 
Unless your governing documents state otherwise, which would be highly unusual, your board has the power to hire a management company.

It is not unusual for the board to want to hire a management company and for many members to want to receive free services from their board members. In your case, the board members are saving less than $20 per month while bearing full responsibility for management. This does not make economic sense for the board members.

It is important to note that the managing homeowner associations requires extensive knowledge in many areas that your board members may or may not possess. Also, hiring a management company eliminates many potential conflicts. These are only some of the important reasons that boards hire management companies. Given the litigious society that exists, very few boards choose self-management.  Top


RESPONSIBILITY FOR WATER DAMAGE

Q. 
Can our condominium association amend its CC&Rs to make every condominium owner responsible for interior damage caused by water intrusion?

A. 
Yes. However, unit owners may still claim that the association is responsible for such repairs due to negligence.  Top


TRANSFER FEES

Q. 
Can a homeowners association charge a transfer fee when a home sells?

A. 
Yes. However, associations may charge no more than what is necessary to defray the costs. This limitation does not apply to management companies. Thus, if an association relies on its management company to handle all record keeping, the association cannot charge a fee. Top


HANDYMAN LICENSE

Q. 
Are handymen required to have a contractor's license?

A. 
It depends. Work on a project for which the combined value of labor, materials, and all other items on one or more contracts is less than $500 does not require a contractor's license. However, work which is part of a larger project, whether undertaken by the same of different contractors, may not be divided into amounts less than $500 in an attempt to meet the $500 exemption. Also, unlicensed handymen must provide the purchaser with the written disclosure stating that they are unlicensed by the Contractors State License board, or the $500 exemption does not apply. Top


CC&Rs NEED TO BE RESTATED

Q. 
Our association has not restated its CC&Rs since 1978. Can we amend our CC&Rs to require that they be restated every five years?

A. 
No. Since the members of every association must approve amendments and restatements, your association cannot require that the CC&Rs be amended or restated. However, you can require that the board submit proposed restated CC&Rs to the membership for their approval every five years.

If you answer “yes” to one or more of the following questions, you should seriously consider revising your governing documents:

1. Are your CC&Rs over five years old?
   
  If so, the document does not reflect a substantial portion of the legislation specifically enacted by the state legislature to govern the conduct and administration of associations.

It is important to realize that one of the primary purposes of CC&Rs is to provide notice to the members (including new buyers) of their legal rights and obligations. Revised CC&Rs, which reference all of the current code sections, will meet the disclosure obligations of the board and management company.
   
2. Does your board find it necessary to regularly obtain legal opinions regarding provisions in the documents either because they are ambiguous or because they do not include recently enacted legislation?
   
  Revised documents will be clear, concise and comprehensive. While the need for future legal opinions may not be completely eliminated, well written, up-to-date documents can substantially reduce the need for legal opinions and can save your association far more money, in the long run, than the short term cost of revision.
   
3. Do your governing documents adequately address possible disasters such as earthquakes and fires?
   
Until the 1994 Northridge Earthquake, many governing documents did not address this complex issue adequately. For example, after the earthquake, it became obvious that many governing documents required boards to make critical decisions before it was possible for them to become adequately informed on all relevant issues. This often resulted in less than optimum decisions that turned out to be very expensive for the association.
   
4. Do your governing documents include obsolete references to the developer and the rights of the declarant which cause confusion?
   
  These obsolete provisions can be eliminated, thus making the documents more concise and clear.
   
5. Do your governing documents omit important rules (such as parking rules) that, if included, would improve your ability to manage the association?
   
  If your rules are inadequate, comprehensive (and legally enforceable) rules can be included in a revised set of governing documents.
  Top

HOA INVESTMENTS

Q. 
Our homeowner association in Beverly Hills recently lost money on its mutual fund account. Is a board of directors allowed to invest association funds in a mutual fund?

A. 
Absolutely not. All funds must be placed in an insured account in a bank, savings and loan association or credit union. Top


GIFTS TO CONTRACTORS AND VENDORS

Q. 
The board of directors of our condominium association in Los Angeles gave Christmas gifts in the form of bonus checks to several vendors and contractors that do work on our buildings. Is this permissible? I don't like them spending our money that way.

A. 
Absent a prohibition in your association's CC&Rs the Board may give gifts to your contractors and vendors as long as they vote on it at an open meeting and act reasonably. Top


 

Permission to reprint our HOA Questions and Answers is granted provided Michael T. Chulak & Associates (MTCLaw.com) is credited as the source.

 

 



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