SB 326: The Balcony Bill

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By Gordon A. Walters, Esq.

On August 30, 2019, Governor Newsom signed Senate Bill No. 326 (S.B. 326) into law, adding two new statutes to the Davis-Stirling Act. Civil Code section 5551 adds a requirement for associations to perform inspections of balconies and other exterior structural elements that the association has an obligation to maintain. Civil Code section 5986 invalidates and voids developer friendly provisions in governing documents that require homeowner votes prior to filing of a construction defect lawsuit. Below is an overview of the important points you need to be aware of regarding these new laws, which will go into effect on January 1, 2020.

Balcony Inspection Q&A

The balcony inspection portion of this bill will look familiar to many, as it resembles the bill passed one year ago (S.B. 721), impacting apartment buildings and other multi-family projects throughout California. Common interest developments were excluded from S.B. 721, as the legislature tinkered with the inspection requirements to make for a more bearable burden on associations.

Which Associations Are Impacted?

Associations with buildings with three or more multifamily dwellings.

What Needs to Be Inspected?

Any “Exterior Elevated Elements” for which the association has a repair or maintenance responsibility – generally, this will be any load bearing components that extend beyond the exterior walls of the building to deliver structural loads to the building. Primarily this includes balconies, decks, stairways, walkways and railings that are supported by wood or wood-based products and are more than six feet above the ground.

Who Can Perform Inspections?

Inspections must be performed by a licensed structural engineer or architect. Larger associations may also need to use a statistician, as the statute requires a statistically relevant sample size be inspected (95% confidence level, with a 5% margin of error).

When Do Inspections Need to Be Performed?

Inspections must be completed every nine years. The first inspection must be completed by the end of 2024. Buildings being constructed after this law goes into effect will need to complete their first inspection within six years of issuance of a certificate of occupancy.

What Must the Inspection Look For?

Visual inspections must confirm that areas are in a “generally safe condition” and “performing in accordance with applicable standards.” If the inspector sees signs that the waterproofing system has been compromised, or that there is risk of damage to the load bearing components of the building, they are to use best judgment to recommend further inspections. If there are any threats to safety of residents, the inspector must notify the association immediately and governmental inspection agencies within 15 days of issuing their report. The association must act immediately to prevent access to dangerous areas and take other appropriate preventive measures necessary to protect the safety of the residents.

What Reports Must Be Generated From the Inspection?

The inspector must issue a written report that includes:

  • Identification of the applicable building components subject to inspection;
  • Current physical condition of the components and whether there is a present threat to the health or safety of residents;
  • Expected future performance of the components and remaining useful life; and
  • Recommendations for any repairs.

The inspector’s report must be stamped or signed and included in the association’s reserve study. The reports generated must be preserved in the association’s records for a period of at least two inspection cycles.

The five-year window to complete the first inspection will allow associations to coordinate the first balcony inspections to take place with an upcoming reserve study inspection. The nine-year balcony inspection cycles will then coordinate with every third reserve study inspection going forward.

Prior to moving forward, an association should also confirm that there are no more stringent inspection requirements in its governing documents or required by local government or enforcement agencies, as the code allows for more stringent requirements to be adopted locally.

Construction Defect Lawsuit Homeowner Voting Requirements

In August 2018, the Fourth District Court of Appeals, Division Three issued an opinion titled Branches Neighborhood Corp. v. CalAtlantic Group, Inc. (2018) 26 Cal. App.5th 743 (“Branches”). In Branches, a community association’s construction defect lawsuit against the builder of the project was dismissed because the association did not take a membership vote prior to filing the lawsuit, as required by a provision in the CC&Rs. The court dismissed the entire lawsuit, which sought over $5 million in damages to the association’s common areas, despite the fact that the homeowners overwhelmingly approved the filing of the lawsuit, voting to ratify the board’s decision to file, 92-1.

Because of the many short statutes of limitation and repose for construction defect claims, associations with similar CC&Rs provisions are often caught in a no-win dilemma. They can risk letting a statute of limitations run by complying with the vote requirement, which often takes months to complete in larger associations. Alternatively, the association can risk filing the lawsuit without conducting the homeowner vote to avoid letting a statute of limitations run, only to have their lawsuit dismissed for failing to take the homeowner vote prior to the filing of the lawsuit. While, on its face, requiring homeowners to approve litigation seems to be a pro-owner provision, as a practical matter, it served to insulate developers from liability by causing delay.

Recognizing the unjust result in Branches, and the no-win situation developers were effectively putting associations into with these onerous vote requirements, the Legislature has acted to invalidate governing document provisions that operate to limit the board of directors’ authority to decide whether to file a lawsuit against the builders of the project for construction defects. Any such provisions contained in governing documents are to be deemed unenforceable, null and void. The failure to comply with any precondition to filing suit, other than those conditions set forth in the Civil Code, cannot be asserted by the builder as a defense for claims brought against the builder.

The statute applies retroactively to all governing documents, whether recorded before or after the enactment of the statute. However, if a claim has already been resolved through a settlement, final arbitration decision or final judicial decision on the merits, the enactment of the statute will not revive any of those claims.

Notwithstanding the Legislature’s decision to invalidate these governing document provisions, associations can enact their own similar provisions, so long as the provisions are enacted solely by non-builder affiliated members of the association.

Maintenance Responsibility, Insurance Obligations, and Notifying the Carriers

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By David A. Kline, Esq.

The CC&Rs for common interest developments typically allocate the responsibility to maintain, repair, or replace various components between the owners and the association.  When the CC&Rs are silent, Civil Code section 4775 provides a default allocation of responsibility.

Recently, we have received a lot of questions about how the allocation of maintenance and repair responsibilities relates to an association’s insurance obligations.  To answer these questions clearly, an association’s obligation to insure a component may have nothing to do with its obligation to maintain, repair, or replace that component.

Condo Communities

When it comes to a typical airspace condominium community, each owner’s deed defines his or her ownership interests, generally in reference to the condominium plan.  The condominium plan describes a three-dimensional airspace that is owned separately by each member and divides the entire community (or a phase of the community) into units, common area, and exclusive use common area.  Typically, the interior surface of the perimeter walls and the unfinished floors and ceilings are identified as the boundaries of the condominium units with everything inside these boundaries (excepting structural components such as bearing walls) being part of the units.

Usually, the CC&Rs define “unit,” “common area,” and “exclusive use common area” in a manner that is consistent with the condominium plan.

Planned Developments

When it comes to planned developments, the community is typically comprised of member-owned lots and association-owned common area.

Allocation of Maintenance Responsibility

The CC&Rs generally identify the maintenance, repair and replacement responsibilities of owners and the association.  Sometimes, the CC&Rs simply state that owners are responsible for the maintenance, repair and replacement of their units or lots and any exclusive use common area appurtenant to their units or lots, and the association is responsible for the common area.  More recent CC&Rs might include a maintenance matrix that provides greater detail regarding which components the owners and association are responsible for.  It is not uncommon, especially for newer CC&Rs, to allocate certain maintenance and/or repair responsibilities in a way that deviates from a straightforward unit or lot/common area delineation.

Often, when a sudden loss occurs, such as a fire or plumbing leak, associations assume that the location of the damage or the allocation of maintenance, repair and replacement responsibility contained in the CC&Rs definitively determine the party responsible for the damage.   However, this may only be partially true.

Insurance Coverage

The CC&Rs generally obligate the association to maintain property and casualty insurance.  In some condominium communities and planned developments, especially when the units or homes are attached, the CC&Rs may obligate the association to maintain insurance covering not only the common area, but certain portions of the units or lots as well – portions that the owners may be responsible for maintaining and repairing under the CC&Rs.  For example, the CC&Rs for a condominium community may require the association to insure components within the units, such as cabinetry, built-in appliances and flooring, or even structural components that the owners are generally responsible for maintaining and repairing.  Likewise, the CC&Rs for a planned development may require the association to insure the homes (i.e., the structures) and, possibly, certain improvements located within the homes.  When an association’s policy covers any damaged portion of the residence, owners have a right to file a claim under that policy.  Because the association is the customer of its insurance carrier, the carrier will often ask the association whether the board would like the carrier to process the claim.  Too often, boards of directors instruct the carrier not to process the claim, either because they cite the owner’s repair obligations or because they take issue with the fact that the owner sought to file a claim without first seeking the board’s permission.

When a board instructs the association’s carrier not to process a claim that would otherwise be covered, the board is interfering with the owner’s rights under the CC&Rs and under the insurance policy.  After all, the owner is an “insured” under the policy and the policy is maintained for the benefit of the owners.

If a board instructs the association’s insurance carrier not to process a claim that would otherwise be covered under the association’s policy, the board is effectively obligating the association to pay for the damage to the same extent the carrier would have, had the claim been processed.

In some cases, it may make sense strategically for the board to ask the carrier not to process a claim that would be covered.  For example, if the amount of the damage is only slightly higher than the deductible, the board might opt to pay the small amount of money the carrier would have paid, rather than allow another claim to affect the association’s loss history.  However, in most cases, it will make more sense to authorize the carrier to process the claim.

Directors & Officers Liability Coverage

The decision on whether to authorize the association’s carrier to process a property claim should not be confused with the decision to notify the directors and officers (“D&O”) liability carrier of facts and circumstances that could lead to a potential claim against the association’s board, officers, manager or any other parties who may be covered by the policy.  When an owner threatens to sue a community association or its board, there is no reason not to promptly notify the D&O carrier about that threat.  And, when a lawsuit is filed, there is no reason not to promptly tender the claim to the D&O carrier.  D&O carriers do not base their decisions about renewals and premiums upon the number of claims that they have been notified about.  D&O carriers base their decisions on their determination about the risk of future claims.

Failure to promptly notify the D&O carrier about potential claims could cause the carrier to deny coverage for an expensive claim that otherwise would have been covered.  Placing the carrier on notice of facts and circumstances that could give rise to a potential claim gives the carrier an opportunity to appoint legal counsel for the association and to make an early settlement offer to limit its exposure to liability.  This is why we often say: “Tender early.  Tender often.”

But, That Can’t Be Right, Can It?

Turning back to property and casualty insurance, it may seem counter-intuitive that the association’s policy covers an owner’s unit or house.  After all, why should the association pay to insure an owner’s separate interest when he or she owns it and is responsible for maintaining and repairing it under the CC&Rs?  For that matter, why should assessments be used to buy insurance that pays to repair damage that the owner him or herself may have caused, such as a kitchen fire?  Unfortunately, this train of thought overlooks the realities of common interest living.  If owners were given the option to insure their own property, many owners would fail to do so.  In the event of a major casualty event, such as a fire, an uninsured owner’s unit or home might not be rebuilt.  In a typical planned development with unattached homes, this could result in an eyesore for the rest of the community.  But, in a condominium or planned development where the structural components of one owner’s residence are integrally tied to those of one or more neighboring residences, lack of insurance coverage for one residence could also prevent or seriously delay the repair or reconstruction of multiple residences.

Even when lack of insurance only delays or prevents the repair or reconstruction of the interior of a unit, the appearance of the community and property values may be impacted.

Conclusion

In summary, an association’s CC&Rs and its condominium plan, if applicable, can be helpful tools in identifying when owners will be responsible for repairing or replacing damaged components within the community and for identifying when owners will generally be liable for the costs associated with this work.  However, the association’s insurance obligations may shift this liability to the association – at least in certain circumstances.

What is an Association’s Duty Before a Wildfire Strikes?

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By Kieran J. Purcell, Esq.

Typically, an association is charged with enforcing its governing documents.  Some aspects of pre- and post- wildfire related activities may be covered by an association’s CC&Rs or Rules (e.g., deadlines for reconstruction of damaged property or architectural approval) but many are not (e.g., the association’s ability to compel brush abatement on owner’s separate interest property).  Yet homeowners may look to the association, if not for actual enforcement activity, then for leadership in this issue.

Providing Voluntary Services

If an association is not required to provide pre-and post- wildfire services pursuant to its governing documents, then any services provided by an association are purely voluntary and with that comes risks.

Consider the 2018 O’Malley v. Hospitality Staffing Solutions case in which a hotel employee voluntarily undertook a welfare check at the request of a guest’s spouse.  The employee did not find the injured plaintiff during his welfare check, but she was found by her spouse sometime later.  The injured plaintiff sued the hotel alleging the employee’s welfare check was not thorough enough and had she been found earlier, she would have received more timely medical care and her injuries would have been less extensive.  The court in O’Malley held that if someone is giving aid to another, then the person providing the aid has to exercise due care.  If the person providing the aid fails to exercise due care and that failure increases the risk of harm to another or if harm is suffered because the other relied on that person’s aid, then the person providing the aid may be liable.

So, what’s the lesson to be learned from the O’Malley case?  If an association voluntarily renders services for the protection of others, it must exercise reasonable care in doing so or the association may be liable under a “negligent undertaking” theory of liability for its failure to exercise reasonable care.

Many homeowners assume their association will render some sort of relief or emergency services should a natural disaster occur.  Some associations even provide periodic reminders or create an “Emergency Preparedness Plan” or an “Emergency Preparedness Committee.”  If your association is going to provide such voluntary services, the association should: (1) clearly inform its residents of the services the Association will and will not voluntarily provide; (2) consult with an expert as to how the association can provide the best quality services possible; and (3) confer with its insurance expert to obtain insurance for any insurable risks.

Premise Liability

Negligence arises when an association, through its board of directors, knows or should know there is a risk of property damage, fails to take reasonable action to prevent such damage, and this failure proximately causes property damage.  The types of negligence asserted against associations are myriad and diverse.  Some of the more common varieties concern premises liability.

Could an association be held to the same standard of care as a landlord regarding premises liability?  In short, the answer is “yes.”  In Frances T. vs. Village Green Owners Ass’n, the California Supreme Court held that in certain instances an association has a duty to investigate criminal activity and take appropriate safety measures, just as a landlord would for his or her tenants.  The Court’s rationale for its holding in Francis T. is that, like a landlord, the association manages and controls the common area, so when a hazard is foreseeable the association has a duty to exercise due care for its resident’s safety in those areas that are under its control.  A court might impose a similar duty on your association if a wildfire is foreseeable because your community is located in high risk area for wildfires.  If your community is located within such an area, your association should consult with an expert as to the kinds of wildfire mitigation measures your association should implement as part of its common area maintenance and your association should implement them if it is able.

Breach of the Duty to Maintain

An association could be liable, even if it was not negligent, if it failed to adequately discharge its maintenance duties as required in its governing documents.  In Franklin v. Marie Antoinette Condominium Ass’n., a building component the association had a duty to maintain, pursuant to its CC&Rs, leaked resulting in property damage to an owner’s condominium.  The owner of the condominium sued the association for breach of the association’s duty to maintain and for negligence. The court in Franklin discussed how an association might be liable regardless of whether it acted negligently if the association had a duty under its CC&Rs and it breached that duty.

Good Samaritan Laws

Will an association be protected as a “Good Samaritan”?  California Health & Safety Code section 1799.102(b)(2) offers some protection to “Good Samaritans,” but under fairly narrow circumstances.  In relevant part it provides, “no person who, in good faith and not for compensation, renders emergency medical or nonmedical care or assistance at the scene of an emergency shall be liable for civil damages resulting from any act or omission other than an act or omission constituting gross negligence or willful or wanton misconduct.”  A careful reading of this language shows it may provide immunity to an individual, who renders emergency medical or nonmedical care at the scene of an emergency, but not an association as a corporate entity.

So, what’s an association to do?  A good place to start is by reviewing the association’s governing documents, for example:

Easement Rights

Generally, CC&Rs grant the association and owners nonexclusive easement rights of ingress and egress through the common area and separate interest property for specified purposes, e.g., maintenance the association or owner is obligated to perform under the CC&Rs.  However, do your association’s CC&Rs allow it to access an owner’s separate interest property to do brush abatement, clear debris, or other common pre/post-wildfire activities?  And if so, do the CC&Rs permit the association to impose an individual assessment to recover its costs if it performs these tasks after an owner fails to do so?  Does the association have the authority to: (a) barricade damaged common areas; (b) control or limit access over streets; (c) open gates to admit emergency vehicles; and (d) shut-off utility valves, cap leaks and repair non-common area lines?

Exculpatory Clauses

An exculpatory clause is a provision in an association’s CC&Rs which typically exonerates it from liability for certain types of damages.  California courts have accepted the validity of exculpatory clauses in CC&Rs, which exonerate an association from having to reimburse an owner for property damage caused by a failed component the association had a duty to maintain, when the failure was not due to the association’s negligence.  (See the Franklin v. Marie Antoinette case.)  If your association still has its original 1970’s era CC&Rs, it’s unlikely they will contain such an exculpatory clause.  However, if your CC&Rs were written or amended within the last 20 years or so they may contain an exculpatory clause, and if so, this may impact the association’s liability for property damage after a wildfire occurs.

Insurance Obligations

Most governing documents contain insurance provisions, but they can vary greatly from association to association, so it’s a good idea to consult with your association’s community management team, its insurance broker, and legal counsel to: (1) confirm that your association is meeting its existing insurance obligations and (2) determine if additional insurance coverage is a good idea (e.g., guaranteed replacement cost or anticipated emergency activities coverage).

Damage, Destruction and Partition

CC&Rs often contain provisions establishing the duties and responsibilities of owners in the event their separate interest property is damaged or destroyed by fire or another casualty.  It is common for these provisions to require owners to rebuild, repair, or reconstruct their separate interest property in a manner substantially similar to its condition/appearance prior to the casualty or as approved by the association within a specified period of time.  Is the specified time limit (sometimes as short as 30 days) adequate?  Consider the feasibility of the time limit not only from the stand point of a single property being damaged, but also following a conflagration like the 2007 Witch Creek fires, in which over 1,000 homes were destroyed.  What triggers the start of this time clock?  The date of the loss?  Or, something which sounds logical-like the date owner receives insurance proceeds-which may be difficult or impossible to accurately determine.

The above list of governing document provisions to consider is provided solely for the purposes of discussion and is not intended to be an all-encompassing list.  If your review of your governing documents identifies areas of concern, you may wish to consider working with your community management team and legal counsel to amend your governing documents.

It’s the 25th Anniversary of Nahrstedt

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By David A. Kline, Esq.

September 2, 2019, marks the twenty fifth anniversary of the California Supreme Court’s decision in Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal. 4th 361 (Nahrstedt), the seminal case in California common interest development law.

You might remember Nahrstedt as the “cat case.”  Nahrstedt involved a challenge to a pet prohibition in a condominium community’s CC&Rs.  The homeowner asserted that the association’s pet restriction was unreasonable and could not be enforced against her three indoor cats because they caused no noise and did not create a nuisance.  The court of appeals agreed with her.  But, the Supreme Court disagreed for a number of reasons that have affected the reasoning of many court cases since then.

In this article, we will reexamine the reasoning in Nahrstedt, explore its influence on other cases, and consider how it might be expanded in the future.

The Court in Nahrstedt explained:

[U]nder subdivision (a) of [Civil Code] section 1354 [currently codified as 5975] the use restrictions for a common interest development that are set forth in the recorded declaration are “enforceable equitable servitudes, unless unreasonable.” In other words, such restrictions should be enforced unless they are wholly arbitrary, violate a fundamental public policy, or impose a burden on the use of affected land that far outweighs any benefit.

This reasoning was extended in Sui v. Price (2011) 196 Ca. App. 4th 933 to apply the same test for reasonableness of an association’s operating rule that authorized the towing of inoperable vehicles.  In Dolan-King v. Rancho Santa Fe Association (2000) Cal.Rptr.2d 280, the court relied on this same language to uphold an association’s architectural guidelines that were more specific than the general language in its CC&Rs.

The Court in Nahrstedt said, “[T]he reasonableness or unreasonableness of a condominium use restriction that the Legislature has made subject to section 1354 is to be determined not by reference to facts that are specific to the objecting homeowner, but by reference to the common interest development as a whole.” In other words, it did not matter that her indoor cats did not bother anyone.  Their mere presence violated the CC&Rs and the restriction in the CC&Rs was reasonable as applied to the entire community.

That language was cited in Liebler v. Point Loma Tennis Club (1995) 40 Cal.App.4th 1600, a case involving a non-resident owner’s right to use the recreational facilities.  In the Liebler case, the CC&Rs prohibited any severance of the right to use the recreational facilities from the right to use a unit.  The court held that the restriction requiring owners to give up their right to use the recreational facilities and assign the right to their tenants is reasonable when applied to the development as a whole.

That language was also cited in Colony Hill v. Ghamaty (2006) 143 Cal.App.4th 1156.  In that case, the court rejected an owner’s challenge to the reasonableness of the “single-family residential” use restriction in the CC&Rs when used to prohibit him from renting rooms out in his home to multiple residents under separate rental agreements.

Nahrstedt also held:

[W]hen … a restriction is contained in the declaration of the common interest development and is recorded with the county recorder, the restriction is presumed to be reasonable and will be enforced uniformly against all residents of the common interest development unless the restriction is arbitrary, imposes burdens on the use of lands it affects that substantially outweigh the restriction’s benefits to the development’s residents, or violates a fundamental public policy.

The court in Cebular v. Copper Arms Homeowners Association (2006) 47 Cal.Rptr.3d 666, relied on this language to uphold a CC&R provision providing for unequal, weighted voting rights and assessment amounts based on the size of the unit airspace owned by an owner.

The court’s decision in Nahrstedt has a big impact on community associations and how they are governed.  Often, when representing a faceless corporation seemingly ruthlessly enforcing its CC&Rs against a sympathetic resident, it can be difficult to find words that will elegantly express why the association’s argument deserves attention.  Friends and family sometimes ask me, “how could you remove a child from senior housing when the court granted custody to his grandmother to remove him from his drug-addicted parents?” or “how could you foreclose on a homeowner struggling to make ends meet?” I tell them what the Supreme Court said in Nahrstedt – “Our social fabric is founded on the stability of expectation and obligation that arises from the consistent enforcement of the terms of deeds, contracts, wills, statutes, and other writings. To allow one person to escape obligations under a written instrument upsets the expectations of all the other parties governed by that instrument … that the instrument will be uniformly and predictably enforced.”

Sometimes, when I struggle to find an argument to benefit my client and I can’t think of anything better than, “it just isn’t fair,” I re-read Nahrstedt and find a nugget of wisdom.  I am reminded of one association’s onerous restriction in the CC&Rs requiring membership approval and lender approval for any changes to the landscaping design of the community.  When our client wanted to convert to drought tolerant landscaping during the statewide drought, we relied on Nahrstedt to argue that the restriction violates a fundamental public policy in support of water conservation.

How might courts rely upon Nahrstedt in the future?

 

What’s All the Buzz About FHA?

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By Karyn A. Larko, Esq.

You may be hearing rumors that the Federal Housing Administration has made changes to its requirements for insuring condominiums.  The rumors are true and the new requirements will take effect on October 15, 2019.

Before addressing the substantive changes made by the FHA, however, it is important to mention that the certification period for FHA approved condominium projects has increased from two (2) years to three (3) years.  This means that condominium associations who want to maintain their FHA certification will only have to re-apply every three (3) years going forward.  While not as convenient as the “old days” when FHA certification did not expire, it does reduce the frequency with which associations must go through the re-certification process.

The first noteworthy change when it comes to FHA and condominium associations is the addition of spot or single-unit FHA approval.  Under the current FHA guidelines, a project or phase of a project must be FHA certified in order for any unit within the project or that phase to be eligible for FHA.  As of October 15th, it will be possible to obtain FHA certification on a condominium unit within a project that is not certified provided certain requirements are met, including the following:

  1. The project is a completed project consisting of at least five (5) residential units.
  2. The project is not comprised of manufactured housing.
  3. The unit is not part of a project that is FHA certified or has one or more FHA certified phases.
  4. For a project with at least twenty (20) units, the percentage of units within the project owned by the same party or related parties does not exceed 10%. For the purpose of this requirement, a related party is an individual related to another unit owner by blood, marriage or operation of law; a person serving as the unit owner’s officer, director or employ; or a direct parent, subsidiary or other related entity with which the unit owner shares a common officer or director. For a project with fewer than twenty (20) units, no owner may own more than one (1) unit and no related party may own a unit.
  5. For a project with at least ten (10) units, no more than 10% of the units within the project are already FHA insured. For a project with fewer than ten (10) units, no more than two (2) units within the project are already FHA insured.  (This requirement differs from FHA certified projects where the FHA will insure up to fifty percent (50%) of the units.)
  6. The project is at least 50% owner occupied.
  7. The project meets other standard requirements for FHA (e.g., no more than 15% of the units are delinquent in the payment of regular or special assessments by more than sixty (60) days, no more than 35% of the project is mixed use).
  8. The borrower meets certain eligibility requirements.

The second noteworthy change is the expansion of the definition of site condominiums. Under the FHA guidelines, projects consisting solely of site condominiums do not require project-wide FHA certification or single unit approval.  Currently, site condominiums are defined as single family totally detached dwellings encumbered by CC&Rs and a condominium form of ownership, where the units consist of the entire structure as well as the site and airspace, and the owners are solely responsible for the insurance and maintenance costs for their units.  As of October 15th, site condominiums will include condominium projects (other than manufactured homes) consisting of horizontally attached dwellings (i.e., townhomes) where the units consist of the dwelling and land.  The requirement that the owners be responsible for all insurance and maintenance costs pertaining to their units still exists, with the exception of landscaping.

When was the Last Time Your Board Met with Your Insurance Agent?

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By Dea C. Franck, Esq.

Your association insurance agent’s knowledge and expertise can be critical to the health and longevity of your community. Yet, association boards of directors often forget to consult with them.

Meeting with your association’s insurance agent every year not only allows your board to get to know your agent personally, but it gives your agent the opportunity to explain the association’s insurance coverages, recommend any changes in coverage, and answer any insurance questions your board may have.

Your fellow homeowners may also be surprised to find out that the association’s master policy does not provide the broad coverage they think it does.  Homeowners usually make this discovery when their home has been damaged and they find out there is a gap in coverage between the association’s master policy and their individual policy.  In an effort to prevent such an unwelcome surprise, boards should ask their association’s insurance agent to prepare a letter to the homeowners which explains what the association’s master insurance policy will and will not cover.  The association’s agent should review and update the letter annually.  While not legally required, this letter can be included in your association’s annual budget report and policy statement and would supplement the association’s insurance information that must be disclosed to the homeowners yearly.

Finally, every year the association’s insurance agent will likely ask the association to fill out insurance applications in order to renew or purchase insurance coverage.  The information provided by your association on these applications is extremely important because your association’s insurance policies will be underwritten based on the information provided therein.  Upon receipt, your board should review and fill out these applications to the best of its knowledge.  If your association contracts with a professional management company and your community manager fills out these applications on your board’s behalf, the board should review the responses provided for accuracy and thoroughness.  Failing to disclose or providing inaccurate information as requested on the application could result in the insurance carrier either refusing to provide coverage for certain claims or rescinding or cancelling the policy.  Any questions about how to fill out an insurance application should be directed to your association’s insurance agent.

Your association’s insurance agent is the expert when it comes to your association’s insurance policies.   When in doubt, do not hesitate to contact them for advice or clarification.  This is part of the service they provide.

Welcome Emily Long!

 

Please join us in welcoming Emily Long as an Associate Attorney in our Indian Wells office.

Emily obtained her J.D. from the University of Wisconsin Law School in 2008 and a B.A. with high honors in Sociology and Women’s Studies in May 2004. She is experienced in both litigation and transactional work and is excited to join the EG&H team!

Conflict Resolution

By Jon H. Epsten, Esq.

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It should come as no surprise to all of you that life in a community association (or working for one) is fraught with conflict of all types: “You’re playing favorites,” “You’re discriminating against me,” “My neighbor is irrational and he’s making my life a living hell and it’s the association’s job to fix it,” “I’m not paying the assessments until you do what I want you to do,” “Too late for architectural approval, I already finished construction!”

All too familiar. Unfortunately, it’s going to fall on board members and managers to resolve such conflicts. While some of these conflicts will end up in court, it’s wise and a proper discharge of the board’s business judgment and fiduciary obligation to consider how to resolve conflict within the community at the least social and economic cost. At a time in our country where the most basic civility is in short supply, there are pressures which exacerbate the conflict between associations and members, and between the members themselves. Most board members and managers aren’t schooled in how to defuse conflict (and too many attorneys are better at litigating conflicts than facilitating conflict resolution by other means).

Here are some helpful guidelines to remember about the basic nature of a ‘dispute’:

“It takes two to tango.”

For a conflict to really blossom into something ugly, it generally takes two egos, and mouths which operate better than ears. For conflict to be resolved, it’s going to take someone with a better ability to listen than to talk. Find a board member or manager who is a good listener and you’re halfway to resolving a dispute.

“Much conflict is sustained because no one wants to ‘admit weakness’.”

While volumes have been written about that, remember that ‘when you’re at the edge of a cliff, sometimes progress is a step backwards.’ It’s not weakness to search for some middle ground, and if it takes a good display of humility and an attempt to understand the other side of an argument, that’s time (and energy) well spent.

Compromise is not a dirty word.”

Consider that a lawsuit is going to cost just about as much as the other side wants to make it cost. With some basic guidelines (the board can’t give away common area, for example, nor can it afford to overlook egregious violations of architectural restrictions–but many disputes are about far less), with some willingness to compromise, and some imagination (“No, you can’t plant 60′ species which within 5 years will block your uphill neighbor’s view, but you can plant ___________”), there’s a compromise waiting to be found. Think outside that box!

“You can’t always get what you want;
You can’t always get what you want;
But, if you try sometimes,
You just might find,
You get what you need.”
– Mick Jagger and Keith Richards

Because so many community association disputes end up in court, the legislature has over the years created pre-litigation dispute resolution procedures, some of which (ADR) is actually required before most association cases are filed. A quick refresher on “ADR” and “IDR” follows.

IDR

“IDR,” or “internal dispute resolution,” is a relatively new type of dispute resolution. It is unique to the Davis-Stirling Act. Essentially the Act allows an owner to compel a sit-down meeting with a board member to discuss a dispute. If a written demand is made to the association, the association must meet with the owner, in a reasonable period of time, and at no cost to the owner. (Conversely, if the association would like to convene an IDR session with an owner, the owner is not required to participate.) The parties may agree to use the services of a mediator, but it is not required. It is important to note that the Act does not necessarily require the association (or the member) to ask for IDR before moving on to mediation or arbitration, though that is often the case. The Act anticipates that each association will adopt its own IDR procedure, but if the association does not do so, the Act specifies a default procedure (currently found in Civil Code section 5915).

Some observations:

IDR is not a confidential proceeding (unlike mediation). What is said in an IDR proceeding can be repeated in any subsequent lawsuit.

Consider carefully the best candidate to represent the association in an IDR proceeding. It’s not necessarily the president. In general, it’s the director who can listen to an angry homeowner without taking umbrage, while at the same time effectively putting forth the association’s concerns. (A FAQ is whether the board can attend in its entirety. While not absolutely clear from the statute, it’s not generally a good idea. We do like to see more than one person attend, avoiding the “one-on-one swearing contest” scenario. Often times, attorneys are definitely not welcome. An IDR is supposed to be a meeting between the member and a director, leave the mouthpieces–on both sides–out of it.)

Make sure you understand the dispute when a homeowner asks for IDR. The demand is required to be in writing. If the written demand isn’t clear, ask follow up questions before the IDR begins. This is important so that the board can decide how much discretion the director has.

Even though the association isn’t statutorily required to offer IDR before moving to the offer of ADR, it’s a good idea (unless there’s an emergency requiring some immediate court action). First of all, it makes the association look better if the matter later turns into litigation, and second, you just might get lucky, learn something, and avoid the lawsuit altogether. (It’s also free discovery.)

ADR

California law and tradition recognize three types of alternative dispute resolution (“ADR”): binding arbitration, nonbinding arbitration, and mediation. “Arbitration” is a quasi-judicial proceeding, wherein a person selected by the parties (usually) acts as a judge of a dispute, hearing evidence and argument, and making a ruling. At the end of the proceeding (unless the parties settle in the meantime), a decision will be made.

If the arbitration was a “binding arbitration,” the order may be filed with the court, and thereafter it will operate as a judgment. In general, there is no appeal from a binding arbitration order.

“Non-binding arbitration” is precisely that–non-binding. The arbitrator will make a ruling, but it does not bind either of the parties unless and until they agree to that.

“Mediation” is another form of ADR. It is not a quasi-judicial proceeding, but a facilitated negotiation. The mediator, who is chosen by the parties, has no authority to decide a dispute, only to assist the parties to the dispute in attempting to find some middle ground. If at the end of the mediation, the parties cannot agree, then everyone goes home.

For most disputes in a community association (that is, those involving a request for enforcement of the governing documents, the Davis-Stirling Act or the Corporations Code, as well as prior to recording a lien for unpaid assessments), the party anticipating filing a suit will be required to at least offer ADR to the other potential litigant before filing the suit. (Civ. Code §§ 5925, 5930, 5660)

There are exceptions:

If the suit involves damages in excess of the small claims court jurisdiction, the offer of ADR is not required.

If the suit involves a request for a TRO (temporary restraining order) or preliminary injunction, no pre-filing offer of litigation is required.

The Act provides that the offer of mediation shall be in writing, and the offer is to contain a brief description of the dispute between the parties, a request for ADR, a notice to the party receiving the offer that the respondent must reply within 30 days of receipt or the request will be deemed rejected, and if the person receiving the offer is a homeowner, the association must include a copy of the relevant Civil Code provisions (§§5925-5965.)

If the homeowner agrees to the mediation, the mediation is to be held within 90 days of the acceptance, unless the parties extend that time by written agreement. (Civ. Code §5940(a).)

If a party seeking to file an enforcement action fails to first offer ADR, the complaint may be stricken by the court or placed on hold (stayed) to allow ADR. And, if the party who wins an action has refused to participate in ADR, the court may reduce the amount of fees awarded to that party. (Civ. Code §5960.) While the Act provides that the parties to the ADR are to be “borne” by the parties (Civ. Code §5940(c)), one recent case awarded a homeowner his legal fees incurred during the mediation. Grossman v. Park Fort Washington (2012) 212 Cal.App.4th 1128.

Why we need conflict resolution that does not involve lawsuits:

In a word, lawsuits are often times inefficient and a costly way of resolving disputes, as even attorneys agree:

“Lawsuits consume time, and money, and rest, and friends.” – Sir Alan Patrick Herbert

“The courts of this country should not be the places where resolution of disputes begins. They should be the places where disputes end after alternative methods of resolving disputes have been considered and tried.” – Sandra Day O’Connor

And in the context of communities, lawsuits are not the vehicle of choice for dispute resolution for another very good reason: even if you win, you lose because of the residual mistrust and animosity spawned by the court proceedings.

Finally, there are the lingering problems posed by the money. Of course most lawsuits over the CC&Rs will result in an award of attorney’s fees to the prevailing party, but what happens when the loser cannot or will not pay those fees? Will the association pour more money down the drain, or consider settling instead for less than it “should” have received? It’s difficult to explain to the owners that the association won at the same time the board is imposing an assessment to cover the costs of the lawsuit which remain unpaid by the losing owner (not to mention the catastrophic prospect of a fee award which pales in comparison with the actual costs expended or — God forbid — the loss of a case which seemed a “sure thing” way back when the case started.

Do We Only Need a Member Vote to Borrow Money if the Governing Documents Say So?

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By Karyn A. Larko, Esq.

Borrowing is a common method for community associations to pay for major projects within their communities.  However, Boards frequently find the lending process a lot longer and more stressful than they first imagined – primarily because they do not realize until they are ready to close on the loan that they need member approval, and maybe even mortgage holder approval, to obtain a loan.

It is not uncommon for a community association’s Bylaws or CC&Rs to include a provision expressly providing that the approval of a specified percentage of the membership is required to borrow money.  However, the absence of such a provision in these documents does not necessarily mean that the Board has the authority to take this action on its own.  In some cases, the Bylaws and CC&Rs are silent, but the Articles of Incorporation impose restrictions on borrowing.  In other cases, the Articles, Bylaws or CC&Rs  impose member and/or mortgage holder approval requirements on actions that are, or may be required to borrow money.  Examples of these actions include restrictions on the Board’s ability to unilaterally encumber common area, or pledge or assign other association assets.

One provision that is contained in the Bylaws or CC&Rs for many associations that is commonly overlooked when ascertaining the Board’s ability to borrow money is the provision requiring member approval for contracts exceeding one year.  Because a loan is a contract, a loan with a repayment term exceeding one year will generally be subject to this provision unless there is language in the governing documents that expressly exempts loans from this requirement. Remember also that any regular assessment increase or special assessment needed to repay the loan may also require a membership vote.

If your association requires assistance determining whether member or lender approval is required to borrow money, or assistance obtaining the required approval, please contact us.

Epsten Grinnell & Howell, APC promotes Dea C. Franck, Esq. to Shareholder

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Jon H. Epsten, Esq., Susan Hawks McClintic, Esq. and the Shareholders of Epsten Grinnell & Howell, APC are pleased to announce the promotion of Dea C. Franck, Esq. to Shareholder, effective July 1, 2019.

Dea joined the firm in July of 2013, and her contributions to the firm and leadership in our Indian Wells office are unprecedented. In the six years since Dea has been a part of our team, she has maintained and established numerous key relationships and clients throughout the Coachella Valley and is well-known throughout the community association industry. Dea plays an active role in producing the firm’s annual Community Association Law Resource Book, speaks at the firm’s annual Legal Symposia and has developed and taught countless educational programs for community association board members and managers.

As a member of the Coachella Valley Chapter of the Community Associations Institute since 2015 and currently a member of the Chapter’s Board of Directors, Dea is an Educated Business Partner and has received many awards for her commitment to the Chapter. During her free time, Dea is also on the Board of Directors for Animal Samaritans, an animal welfare organization in the Coachella Valley.

As a Shareholder, Dea will lead the firm’s Indian Wells office, with plans for continued growth in the Coachella Valley, while providing the quality legal services for which our firm is known.