The Senate passed SB 323, Now What?

The Senate passed SB 323 and it is now in the Assembly, where it will be voted on by the Housing Committee. SB 323 prohibits an Association from establishing qualifications for Board Members and adds a number of requirements that are unnecessary. SB 323 attempts to create another one-size fits all approach to California homeowner association governance. Follow this link to watch a short video where Louie Brown, Jr., CAI-CLAC’s Legislative Advocate shares what you need to know about SB 323 and our next steps to defeat this bill.

Here’s how YOU can help!

  1. Vote NO on SB 323. You can send a pre-drafted letter to the Assembly Housing Committee at https://caiclac.com/current-campaigns/.
  2. Share this information with your community and help inform them about the harmful impacts of SB 323.
  3. Like and share our CAI-CLAC’s posts to help reach more people.

Sample Error Declaration

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DECLARATION OF ________________________

PURSUANT TO CIVIL CODE SECTION 5685(c)

 

I, ________________________, declare:

  1. I am the ________________________ for the ________________________ Association.
  2. If called and sworn as a witness, I could competently testify to the matters stated herein as true and correct, based upon my personal knowledge of such matters.
  3. On or about <date>, a Notice of Delinquent Assessment was recorded in ________________________ County, California as File/Page _____________________. This Notice of Delinquent Assessment was recorded in error.

I declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct and that this Declaration was executed this ____ day of <month>, <year> in the County of ________________________, State of California.

 

_______________________________

<name>

Civil Codes of Interest for Assessment Recovery

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Civil Code §1719 – NSF Check Charges
(a) (1) Notwithstanding any penal sanctions that may apply, any person who passes a check on insufficient funds shall be liable to the payee for the amount of the check and a service charge payable to the payee for an amount not to exceed twenty-five dollars ($25) for the first check passed on insufficient funds and an amount not to exceed thirty-five dollars ($35) for each subsequent check to that payee passed on insufficient funds.

Civil Code §5660 – Pre-Lien Notice Requirements
At least 30 days prior to recording a lien upon the separate interest of the owner of record to collect a debt that is past due under Section 5650, the association shall notify the owner of record in writing by certified mail of the following:
(a) A general description of the collection and lien enforcement procedures of the association and the method of calculation of the amount, a statement that the owner of the separate interest has the right to inspect the association records pursuant to Section 5205, and the following statement in 14-point boldface type, if printed, or in capital letters, if typed:
“IMPORTANT NOTICE: IF YOUR SEPARATE INTEREST IS PLACED IN FORECLOSURE BECAUSE YOU ARE BEHIND IN YOUR ASSESSMENTS, IT MAY BE SOLD WITHOUT COURT ACTION.”
(b) An itemized statement of the charges owed by the owner, including items on the statement which indicate the amount of any delinquent assessments, the fees and reasonable costs of collection, reasonable attorney’s fees, any late charges, and interest, if any.
(c) A statement that the owner shall not be liable to pay the charges, interest, and costs of collection, if it is determined the assessment was paid on time to the association.
(d) The right to request a meeting with the board as provided in Section 5665.
(e) The right to dispute the assessment debt by submitting a written request for dispute resolution to the association pursuant to the association’s “meet and confer” program required in Article 2 (commencing with Section 5900) of Chapter 10.
(f) The right to request alternative dispute resolution with a neutral third party pursuant to Article 3 (commencing with Section 5925) of Chapter 10 before the association may initiate foreclosure against the owner’s separate interest, except that binding arbitration shall not be available if the association intends to initiate a judicial foreclosure. [2012 – Based on former §1367.1(a)]

Civil Code §5673 – Decision to Record Assessment Lien
For liens recorded on or after January 1, 2006, the decision to record a lien for delinquent assessments shall be made only by the board and may not be delegated to an agent of the association. The board shall approve the decision by a majority vote of the directors in an open meeting. The board shall record the vote in the minutes of that meeting. [2012 – Based on former §1367.1(c)(2)]

Civil Code §5675 – Contents and Effect of Assessment Lien
(a) The amount of the assessment, plus any costs of collection, late charges, and interest assessed in accordance with subdivision (b) of Section 5650, shall be a lien on the owner’s separate interest in the common interest development from and after the time the association causes to be recorded with the county recorder of the county in which the separate interest is located, a notice of delinquent assessment, which shall state the amount of the assessment and other sums imposed in accordance with subdivision (b) of Section 5650, a legal description of the owner’s separate interest in the common interest development against which the assessment and other sums are levied, and the name of the record owner of the separate interest in the common interest development against which the lien is imposed.
(b) The itemized statement of the charges owed by the owner described in subdivision (b) of Section 5660 shall be recorded together with the notice of delinquent assessment.
(c) In order for the lien to be enforced by nonjudicial foreclosure as provided in Sections 5700 to 5710, inclusive, the notice of delinquent assessment shall state the name and address of the trustee authorized by the association to enforce the lien by sale.
(d) The notice of delinquent assessment shall be signed by the person designated in the declaration or by the association for that purpose, or if no one is designated, by the president of the association.
(e) A copy of the recorded notice of delinquent assessment shall be mailed by certified mail to every person whose name is shown as an owner of the separate interest in the association’s records, and the notice shall be mailed no later than 10 calendar days after recordation. [2012 – Based on former §1367.1(d)]

Civil Code §5685 – Payment and Rescission of Assessment Lien; Liens Recorded in Error
(a) Within 21 days of the payment of the sums specified in the notice of delinquent assessment, the association shall record or cause to be recorded in the office of the county recorder in which the notice of delinquent assessment is recorded a lien release or notice of rescission and provide the owner of the separate interest a copy of the lien release or notice that the delinquent assessment has been satisfied.
(b) If it is determined that a lien previously recorded against the separate interest was recorded in error, the party who recorded the lien shall, within 21 calendar days, record or cause to be recorded in the office of the county recorder in which the notice of delinquent assessment is recorded a lien release or notice of rescission and provide the owner of the separate interest with a declaration that the lien filing or recording was in error and a copy of the lien release or notice of rescission.
(c) If it is determined that an association has recorded a lien for a delinquent assessment in error, the association shall promptly reverse all late charges, fees, interest, attorney’s fees, costs of collection, costs imposed for the notice prescribed in Section 5660, and costs of recordation and release of the lien authorized under subdivision (b) of Section 5720, and pay all costs related to any related dispute resolution or alternative dispute resolution. [2012 – Based on former §§1367.1(i) & 1367.5]

How to Deal with a Lone Ranger Board Member

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By Mary M. Howell, Esq.

What do you do about a “director gone bad?” The director speaks abusively of fellow directors, disrupts Board meetings, repeatedly attempts to revisit issues already decided, discloses confidences, interferes with vendors… what can the rest of the Board do?

The Board’s options are limited, and there is very little statutory or case law to clarify what actions are permitted or prohibited.  Based on commentary (both California and from other states), the Board ought to be able to take the following actions, provided the director in question is given notice and a hearing before the discipline is imposed: private or public censure, removal from a particular office held by the director (such as president, vice-president, etc., but not from the Board, except in limited cases), or exclusion from executive session (where the director has disclosed confidential information).

If the bylaws include a provision making compliance with a stated code of ethics part of a director’s qualifications to serve, the Board may (after notice and hearing and a decision that the director is in violation of such a code) declare that director’s position vacant (that is, remove the director from the Board by Board action alone.)

The members of the association (as opposed to the Board) may recall the director in question (but beware, most attempted recalls are not successful, and if the director has any following within the community, a failed attempt to remove the director can severely divide the community.)

Sometimes the director’s misdeeds can be cured by other means. If a director interferes with vendors, for example, inform the vendors specifically to disregard the director. If the director continues to harass or interfere with vendors, the association might be able to obtain a court order requiring the director to stop interfering. Such an order is enforceable by contempt proceedings.

And, if the issue is disclosure of confidential information, or dissemination of false information, the association may also be able to obtain a court order prohibiting the director from repeating the offense (this is problematic, because the court will usually frame its very narrow order only to prohibit something the director has done in the past, rather than issuing an open-ended prohibition on similar remarks and misinformation).

If the director disrupts Board meetings, consult the rules of parliamentary procedure. The Board should be able to declare the director “out of order” if the Board has adopted rules governing decorum within board meetings. Roberts’ Rules, for example, state that the speaker must confine remarks to the motion under consideration, refrain from attacking another member’s motives, and refrain from speaking adversely on a prior motion. Roberts’ goes on to add that during debate, no member should be permitted to disturb the assembly (such as by whispering to others, or physically disrupting the meeting). In the absence of specific rules prohibiting disruption, consider making a motion to recess the meeting (not adjourn), get a second on the motion, get the Board vote, and then recess for a limited period of time to allow for restoration of order to the proceedings.

Welcome Jackie Quinn!

Please join us in welcoming Jackie Quinn as an Associate Attorney in our San Diego office Transactional Department.

Jackie obtained her J.D. from Boston University School of Law in 2016 and has a B.A. in Psychology with a Minor in Human Development from U.C. Davis. She is experienced in handling complex transactional and litigation cases and is excited to join our EG&H team.

Must We Sue This Owner?

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By Pejman D. Kharrazian, Esq.

A community association board is required to enforce its governing documents against owners. But must a board file a lawsuit if internal enforcement measures fail to gain a recalcitrant owner’s compliance? I often see boards grapple with this difficult decision. The following discussion of California case law explores how directors should decide whether to sue an owner or not and what legal protections are available once that choice is made.

The Business Judgment Rule as a guide and a defense.

In 1977, Beehan v. Lido Isle Community Assn. established that a board may exercise prudent business judgment (i.e., in good faith, in the best interests of the association, and after conducting due diligence) in deciding whether or not to sue over a violation of the governing documents.

But Beehan does not go as far as saying a board can indiscriminately decide not to sue an owner who has violated the governing documents. Instead, it says a decision about whether to sue should be made using the business judgment rule as a guide. The business judgment rule, codified in California Corporations Code section 7231, applies to nonprofit corporations and says:

“A director shall perform the duties of a director . . . in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.”

In following the business judgment rule, a board should, for example: examine the underlying facts, consult with independent legal counsel and other experts to analyze the merits of the potential case, review and follow the governing documents, weigh the costs and benefits of filing a lawsuit versus the nature and magnitude of the owner’s violations, discuss the matter in executive session and memorialize in minutes. A board should also keep in mind the prevailing party attorneys’ fee provisions found in the Davis-Stirling Common Interest Development Act and many CC&Rs—that essentially say, if an association loses the case it could be paying its own attorney and the owner’s attorney!

At the end of the day, if a board’s decision about whether to sue is challenged, the primary defense will likely be the business judgment rule.

Will a court give the board’s decision judicial deference under Lamden?

In 1999, Lamden v. La Jola Shores Clubdominium Homeowners Assn., the California Supreme Court established that when a “duly constituted association board, upon reasonable investigation, in good faith and with regard for the best interests community association and its members, exercises its discretion within the scope of its authority” on how to maintain the common areas, “courts should defer to the board’s authority” (a.k.a., “judicial deference” or the “Lamden rule”). The Lamden rule is analogous to the business judgment rule and is another legal doctrine that affords protection—even if an association is unincorporated.

The court in Haley v. Casa Del Rey Homeowners Assn. recognized Lamden applied to ordinary maintenance decisions. But nonetheless went on to say that Lamden “reasonably stands for the proposition that the Association had discretion to select among means for remedying violations of the CC&R’s without resorting to expensive and time-consuming litigation, and the courts should defer to that discretion.” Haley comes very close and possibly even crosses the line of extending Lamden’s judicial deference standard to a board’s decision about whether to sue.

Haley is not alone in expanding Lamden beyond ordinary maintenance decisions. For example, Dolan-King v. Rancho Santa Fe Assn. granted judicial deference to a board’s architectural decisions; Harvey v. The Landing Homeowners Assn granted judicial deference to a board’s interpretation of the CC&Rs; Watts v. Oak Shores Community Assn. granted judicial deference to a board’s adoption of rules. In taking their broader view of Lamden, Haley, Dolan-King, Harvey, and Watts each quote the seminal California Supreme Court case of Nahrstedt v. Lakeside Village Condominium Association, Inc.:

“Generally, courts will uphold decisions made by the governing board of an owners association so long as they represent good faith efforts to further the purposes of the common interest development, are consistent with the development’s governing documents, and comply with public policy.”

But other cases have tried to limit Lamden: Ritter and Ritter v. Churchill states the Lamden rule protects individual directors from liability, but seems to suggest Lamden will not protect the association (as an entity) from liability for an improper decision.[1] But in Lamden the directors were not parties to the action when the Supreme Court made its decision (only the association was). By that logic, it seems Lamden did apply its judicial deference rule to the association. It therefore, appears Ritter may have gone too far in this regard.

Ritter also reads Lamden narrowly by saying it did not apply to extraordinary (versus ordinary) maintenance decisions by a board, whereas, Haley, Watts, Harvey, and Dolan-King indicate Lamden can apply beyond ordinary maintenance decisions. Ritter seems to be an outlier in this regard.

Further, Affan v. Portofino Cove Homeowners Assn illustrates that Lamden does not apply to decisions of association managers and does not generally apply in situations where no decision is made by the board (inaction versus action).

If future courts are inclined to expand Lamden’s judicial deference rule, then the decision of an association board about whether to sue may be given judicial deference by a court, in addition to the protections provided by the business judgment rule.

 

[1]  Other cases have held an association can remain liable for injury to third parties that flows from improper decisions. (See e.g., Frances T. v. Village Green Owners Assn.; White v. Cox)

Rental Restrictions – A Potential Pitfall for Condominium Communities

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By Karyn A. Larko, Esq.

It is common for associations to amend the rental provisions in their CC&Rs in an effort to address the issues associated with tenants.  However, when an association is a condominium community, there is an important consideration that is frequently overlooked during this process – the FHA.

With few exceptions, FHA insured mortgages and reverse mortgages on units within a condominium community are only available if the community is FHA certified.

The FHA will only certify associations that meet all of the certification requirements, including those pertaining to rental restrictions.  The rental restrictions the FHA allows are limited to the following:

  1. A requirement that all leases must be in writing.
  2. A requirement that that leases comply with the association’s governing documents.
  3. A requirement that owners provide the association with a copy of their lease or sub-lease.
  4. A requirement that owners provide the association with the names of all tenants and any family members of the tenants who will occupy their unit.
  5. A prohibition on leasing for an initial term of not less than 30 days.
  6. A maximum allowed length of lease.
  7. A restriction on the number or percentage of units that may be concurrently rented within the community, provided this percentage does not exceed 50%.
  8. Language allowing the Board to grant hardship exceptions to the rental cap.
  9. A requirement that owners check the Registered Sex Offenders list prior to renting.
  10. A requirement that rent be assigned to the association if a unit owner is delinquent in the payment of assessments.
  11. A requirement that the Board review leases (but not that the Board approve leases).
  12. A requirement that a specific form be used for leases.
  13. Corporate leasing restrictions.

Complete prohibitions on renting, prohibitions on new owners renting their units, stated minimum lease periods greater than 30 days, requirements that leases and/or tenants be vetted and approved by the Board, and requirements that owners perform a background check on potential tenants (other than a check of the Registered Sex Offenders list) are a few examples of rental provisions that will disqualify an association for FHA certification.

Stated minimum lease periods of less than 30 days will also generally disqualify an association for FHA certification.  However, it may be possible to overcome such a provision with a declaration signed by a Board member or manager attesting to the fact that, to the best of his/her knowledge, no units are being leased for a period of less than 30 days or for hotel or transient purposes.

For more information on FHA certification requirements, please see HR 3700: Requirements for Qualifying and Applying for FHA Certification.

Please contact me for assistance with FHA (or VA) certification.  I am here to help.

Solar Energy Systems: Civil Code §4746 and “Equitable Allocation”

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By Jillian M. Wright, Esq.

Since January 1, 2018, California community interest developments have been required to allow members to install solar energy systems on common area roofs of the buildings in which their unit is located or on roofs of adjacent carports or garages (See Civ. Code §§ 714.1, 4600, and 4746). However, this does not mean a member can put as many solar panels as he or she wants up on the common area roof without consideration of neighbors in the building. The California Legislature fortunately included a provision into Civil Code section 4746(b) which states in part:

(b) When reviewing a request to install a solar energy system on a multifamily common area roof shared by more than one homeowner pursuant to Sections 714 and 714.1, an association may impose additional reasonable provisions that:

(1) (A) Require the applicant to submit a solar site survey showing the placement of the solar energy system prepared by a licensed contractor or the contractor’s registered salesperson knowledgeable in the installation of solar energy systems to determine usable solar roof area…

(B) The solar site survey shall also include a determination of an equitable allocation of the usable solar roof area among all owners sharing the same roof, garage, or carport.

(Civ. Code § 4746(b))

While this provision prohibits the first owner in a building who wants to install a solar energy system from taking all the usable space on the roof, it unfortunately fails to define what an “equitable allocation” is. Does it mean each member in the building gets an equal amount of square footage of the usable roof[1] or does it mean each owner should get a proportion of the usable roof space that would result in an equal amount of energy output? We interpret it to mean the latter.  This interpretation promotes solar ownership as it theoretically allows all owners in a building an equal opportunity to the same quantity of solar energy, whereas the former interpretation rewards only the first installers of solar energy systems who utilize the most energy efficient square footage available on the shared roof.      Even if equitable allocation is based on a proportional share of potential energy production, as technology evolves and energy output for solar energy systems improves, equitable allocation may change over time. If this happens, the Board may need to reconsider existing determinations of equitable allocation.

Another quandary arises when a building contains different sized units or members in a building pay variable assessments based on unit size. The Board must then determine if “equitable” means “equal/identical proportions” or “fair/reasonable.”  For example, one could argue that if a member pays more in assessments, then it would be fair for that member to  use a larger share of the usable common area roof space based on the owner’s assessment to common area ratio for the building.  In situations where assessments are variable, this is a reasonable interpretation; however, where assessments are equal for all units, it becomes more difficult for an owner to argue he is entitled to more roof space based on unit size alone.

Ultimately it is up to the board to decide what is fair and reasonable when determining the equitable allocation of a common area roof. Each association and each building is different, and unfortunately there is no black and white answer that applies in every situation.  If you require further guidance in making such a determination, Epsten Grinnell & Howell, APC can assist you in the process.

 

[1] This is another term the legislature failed to define. Since the legislature appears to leave the preparation of a solar site survey in the hands of the solar installer, it might be necessary to obtain the opinion of the solar installer on what portion of the roof is considered “usable” on a case-by-case basis.   Generally, we believe the definition of “usable roof” to be those portions of the roof that get sun (are not shaded by trees or vents) and can feasibly support an energy system.

 

Keywords: Solar Panels