Budgeting Appropriately for Increasing Costs with Regular Annual Assessments

By David A. Kline, Esq.

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Civil Code section 5600(a) requires an association to “levy regular and special assessments sufficient to perform its obligations under the governing documents and [the Davis-Stirling Act].” To that end, Civil Code section 5605 gives boards of directors the authority to increase regular assessments by up to 20%, without a membership vote.

As costs naturally increase over time due to inflation, material costs increase due to supply chain shortages and insurance premiums increase in response to the rising risk of drought-fueled wildfires, directors of common interest developments often find it difficult to manage their association’s budget.

Although it is important for board members to carefully scrutinize an association’s costs, consistently and steadfastly refusing to increase regular assessments to account for rising costs can lead to disastrous results for homeowners. Eventually, a hefty special assessment may be needed when long deferred maintenance results in property damage, or worse.

Often, candidates for the board of directors make campaign promises to cut regular assessments claiming they will reign in years of alleged financial mismanagement. And, board members often tout an association’s consistent level of regular assessments as evidence the association is well-managed and financially stable. In fact, these arguments are misplaced. Artificially keeping assessments low can be a major red flag, often indicating significant financial struggles around the corner. This is especially true now with inflation and the difficulties of obtaining goods and services.

Too often, boards of directors ignore the advice of the association’s experts, defer routine maintenance, fail to adequately fund the reserve account in accordance with the approved reserve funding plan, or otherwise kick their problems down the road for future boards and homeowners to address. This simply delays the inevitable and often ends up costing the association and the owners more in the long term and may create the need for a large special assessment to perform needed work in the community. Owners are often shocked when hit suddenly with a large special assessment and may have difficulty paying it when they prepared their own household budget based on an assumption of their association’s financial well-being.

When boards decide to forego a long-term warrantied roof replacement project, opting instead for a short-term patch job, or delay replacing corroded and worn-out pipes despite multiple leaks, for example, associations may find themselves paying not just to replace the broken common area components (often at a greater expense than would be paid if the board had been more proactive), but may also have to pay for the avoidable resulting damage to the separate interests as well. This can be much more expensive for homeowners in the long run, especially if the association’s insurance carrier denies coverage for damage due to the association’s alleged failure to properly maintain the failed component.

This is not to suggest that delaying an important infrastructure project is never appropriate. It may be appropriate for a board to prioritize repairing damaged structural components that threaten the health and safety of the residents above less critical repairs. However, boards of directors, and candidates for the board of directors, should be candid with the members about the rising costs that they anticipate. Homeowners should not be surprised by moderate, incremental increases in regular assessments from one year to the next. Anyone who pays attention to the news is well aware of rising inflation and community associations are subject to this like everyone else.

Sudden unexpected special assessments are never welcome, but they are particularly frustrating when they could have been avoided with honest and transparent budgeting decisions – this includes annual assessment increases to keep up with rising costs.

Boards should expect small incremental increases to most budget line items each year to keep up with inflation and make these annual assessment adjustments as needed in an effort to avoid large increases or special assessments in later years.

Acclamation Decisions Have to be Made Early

By David A. Kline, Esq.

When Civil Code section 5103 became effective on January 1, 2022, many community association managers and board members celebrated the new authority for boards to approve nominees by acclamation when there are not enough candidates to hold a contested election. However, there are limitations on a board’s ability to approve nominees by acclamation and a decision needs to be made very early in the election planning process about whether approval by acclamation might be an option – long before the board will know how many nominees will ultimately emerge.

In order to approve candidates by acclamation, section 5103 requires several procedures to take place. First, notice of the nominating process and the possibility of an election by acclamation must be provided to all members by individual notice at least 90 days before the deadline for nominations. This requires the election process to begin at least 60 days earlier than is otherwise required to conduct an election under Civil Code section 5115(a). And, because 5103 requires individual notice of the nomination procedures, whereas 5115(a) only requires general notice, the additional cost of providing individual notice should be considered. Second, section 5103(b)(2) also requires providing a second, similar reminder notice to the members before the deadline for nominations, again by individual notice, that is not required by Civil Code section 5115 if acclamation is not an option.

The requirement to send notices by individual delivery places an added burden on associations. General notice of documents can be satisfied, under Civil Code section 4045, simply by posting a document in a prominent location or on the association’s website, if those locations are described in the Annual Policy Statement. (Though, it should be noted that individual delivery is required for any member who requests it.) And, while delivery by individual notice may be accomplished by email under Civil Code section 4040, most associations deliver individual notice by first class mail, postage prepaid, particularly if the association does not maintain evidence that every member has consented in writing to receive communications by email, as would be required for email delivery. So, in most cases, delivery by individual notice costs more than general notice.

The board must also consider whether there is sufficient time to provide a 90-day nomination period. For example, suppose the association’s bylaws require the annual meeting to be held in the first week of September. If, by the second week of April, the board has not instructed management or the inspector of elections to provide individual notice of a 90-day nomination period and possibility of election by acclamation, there would not be enough time to comply with the legal requirements of section 5103 to potentially allow the board to approve the nominees by acclamation.

So, as a practical matter, before nominees are sought, it would be prudent for the board to decide whether the additional time and expense of providing two notices by individual delivery is worth the benefit of potentially approving nominees by acclamation and saving the cost of mailing ballots and any other costs that might be incurred in an election.

On that note, a board that is inclined to hire a professional inspector of elections, rather than to rely on one or more homeowner volunteers, might not always save money by deciding to approve nominees by acclamation. Under Civil Code section 5115(b)(1), associations must provide notice to members of “the date and time by which, and the physical address where, ballots are to be returned by mail or handed to the inspector or inspectors of elections” at least 30 days before the ballots are distributed. Civil Code section 5115(c)(2) requires that the physical address where ballots are to be returned either be the inspector of elections’ address or an address specified by the inspector of elections. This means that the inspector of elections must be selected at least 60 days before the election date so that address will be included on the 5115(b)(1) notice. Since the board won’t know if balloting will be necessary until just before a 5115(b)(1) notice would need to be sent, it might not be practical to wait that long before hiring a professional inspector of elections. A possible option might be determining whether any prospective inspector consents to ballots being sent to the management company or some other location instead of directly to the prospective inspector.

Another issue to consider is whether the board may have any difficulty in achieving quorum on short notice at the latest opportunity to select an inspector of elections or may need to postpone the annual meeting. In addition, if the board waits that long before selecting an inspector of elections, it might be difficult to find an inspector of elections who is still available on the date of the association’s annual meeting. On the other hand, if the board signs a contract with a professional inspector of elections earlier in the process and the contract does not allow termination within 60 days of the election, the association may have an obligation to pay the inspector of elections, even if the election will be held by acclamation.

It’s also worth keeping in mind that the election of directors may be only one issue for the members to decide at the annual meeting. Ballots may still be needed for other items to be voted upon at the annual meeting, such as approval of the minutes of the prior annual meeting or an election under IRS Revenue Ruling 70-604.

Board members who are aware of this new ability to conduct elections by acclamation may be very enthusiastic to save money on unnecessary elections and might assume that management and/or the inspectors of elections will comply with all requirements to enable the board to approve nominees by acclamation. Likewise, management might assume that the board would prefer to save money on the cost of mailing notices by individual delivery – costs that may turn out to have been unnecessary if more candidates than open board positions emerge.

It’s important for the board and management to communicate their expectations long before the next annual meeting (ideally at least six months before the next annual meeting) to avoid any misunderstandings. Be prepared to discuss the association’s cost and method of providing individual notices and general notices to the members, the cost of printing and mailing ballots, the availability of various professional inspectors of elections on the date of the annual meeting, the termination provisions in the contracts proposed by those inspectors of elections, the fees charged by management to attend board meetings and annual meetings, and the likelihood of finding more nominees than seats available on the board.

The following table may provide a helpful guide for those discussions:

Procedure Acclamation Election by Ballot Comparison
Notice of Nomination Procedures and possibility of election by acclamation – 90-days before deadline for nominations.

– Individual delivery required

– 30 days before deadline for nominations

– General delivery is acceptable

Acclamation requires a longer nomination period and may require more postage
Nomination and possibility of election by acclamation reminder notice – 7-30 days before deadline for nominations

– Individual delivery

Not required

 

Acclamation requires an additional notice, which may require more postage
Board meeting to approve by acclamation Open board meeting required No board meeting required. An additional board meeting may be required to approve nominees by acclamation.
Inspector of Elections Not needed since no ballots will be counted Must be selected at least 60 days before election. It’s prudent to select an inspector of elections before the deadline for nominations.  But, if the association cannot terminate its contract with a professional inspector of elections, it may have to pay for services that are unnecessary.
Ballot delivery Not necessarily required Must be mailed or delivered to all members Acclamation could save the cost of printing and mailing ballots

 

 

Record Retention: Meet the New Board, Same as the Old Board

By David A. Kline, Esq.

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Often I hear members and directors distinguish between events that took place “under the old board” and those that take place “under the new board.” The implication of this distinction is that the election that brought in “the new board” somehow wiped the slate clean or that a new entity was somehow formed.  In reality though, a community association is a single entity that continues despite changes in its membership, officers, directors and management.

There is no legal distinction between decisions made by “the old board” and those made by “the new board.” Rather, the business and affairs of community association are conducted by one body – the board.

Although the board may change its mind from time-to-time, it is important to recognize that decisions made by the board may continue to affect the association into the future, regardless of any changes that may occur in the composition of the board or management.

A recent decision by a Federal District Court in Florida illustrates the problems that can occur when a community association fails to recognize decisions made by “the old board.” (Peklun v. Tierra Del Mar Condo. Ass’n, 2015 U.S. Dist. LEXIS 163554 (S.D. Fla., Dec. 7, 2015), “Tierra Del Mar.”)

In February of 2015, Sergey Peklun took his own life. He had been living with his dog, Julia, at Tierra Del Mar Condominium Association in Boca Raton, Florida. In 2011, he received a notice from the association that his dog’s presence violated the association’s pet restrictions.  He responded to that notice explaining that his doctors recommended keeping Julia as an emotional support animal due to his anxiety and depression. His assertion that Julia was an emotional support animal was supported by letters from two doctors. In September of 2011, the association’s board of directors granted Mr. Peklun a reasonable accommodation to keep his emotional support dog. Then, the composition of the association’s board changed and the association changed management companies.  Can you see where this is headed?

A neighbor complained about the dog’s presence and the association demanded that Julia be removed from the premises. When Mr. Peklun asserted that Julia was a service dog, the association sought evidence of the dog’s certification as such. In 2013, when Mr. Peklun failed to provide that evidence, the association denied Mr. Peklun’s request to keep his dog and demanded its removal.  Importantly, the board focused its attention on whether the dog was trained to provide a service for Mr. Peklun rather than on whether he continued to need the dog as an emotional support animal.

Meanwhile, the complaining neighbor sued Mr. Peklun for an injunction ordering the dog’s removal. The judge issued that injunction based on an affidavit from the association’s president stating that there was no record the board of directors had ever granted Peklun an accommodation. Mr. Peklun took his own life on the day he was to appear in court on a contempt motion for his willful disregard of that court order.

Mr. Peklun’s widow and son sued the association, its president, and the neighbor for intentional infliction of emotional distress and for violations of the Fair Housing Act, among other causes of action. The Court refused to grant the association’s motion for summary judgment on the Fair Housing Act claim. The Court explained that the association was within its rights to inquire whether Mr. Peklun continued to need his dog as a reasonable accommodation.  However, the Court continued, “Because knowledge of the 2011 accommodation…was imputed to [the association’s] current board and also brought to its attention again in 2013, it had an obligation to open a dialogue regarding Julia’s purpose before denying the request.” (Tierra Del Mar, at 48.)

The above case is just one example of the problems that can occur when a community association fails to retain adequate records through a change in management.

  • Are your association’s records maintained in a way that would alert future directors and managers of decisions the board makes today?
  • Does your document retention policy adequately ensure that minutes will not be destroyed?
  • Does your association maintain minutes in a format that is easily searchable?
  • If a new management company has taken over, were the old records reviewed and incorporated into the association’s current files? Or, were they placed in a file box and stored in archives without a second thought?
  • When corresponding with a homeowner, what steps do you take to ensure that the association’s “institutional memory” is as good as that homeowner’s? Does your association maintain an individual file for every unit or lot?

When associations change management companies, it is understandable that emotions may run high.  Rather than simply transferring disorganized boxes from one office to another, it is well worth the association’s efforts and expense for the old management company to index its files and records and to meet with the board and the new management company to explain how those records are organized.

  • What could the Tierra Del Mar board have done in 2011 to ensure that its decision in 2011 would be known by the board in 2013?
  • If you were the old manager, how would you have ensured a smooth transition of association records?
  • If you were the new manager, how would you have incorporated the association’s old records into your own records-management system?

If you have suggestions or best-practices that you would like us to share in our next newsletter, please e-mail us.

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.

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?

 

Q&A. Re: Balcony Inspections. Homeowner has extended their balcony. Board of Directors believes they are responsible for maintenance up to the point of original construction?

A. In most condominium communities, the common area is defined as the entire community other than the units.  Typically, balconies are depicted on the condominium plan as a three-dimensional air space that is either a separate element of the living unit or exclusive use common area appurtenant to the unit.  The structural components of the balcony (just below and outside of the balcony airspace) are typically common area.  Because any extension of the balcony would not likely be described in the CC&Rs or depicted in the condominium plan, the extension would typically be common area.  And, since most CC&Rs generally obligate the association to maintain the common area, if there is no language in the CC&Rs to the contrary, the association would likely be responsible for maintaining, repairing, and replacing the balcony extension.  Associations that are considering allowing an owner to extend their unit into the common area should first consider whether membership approval is required under Civil Code section 4600 and whether an amendment to the Condominium Plan is necessary.  If approval is granted, the association should enter into a recorded agreement with the owner that shifts maintenance responsibility to the owner and his or her successors, and that requires the owner and all successors to indemnify the association against any claims relating to the association’s approval of the extension and the owner’s construction and maintenance of the extension. – David A. Kline, Esq.

Q&A: What penalties can an association impose for violating vehicle use rules (e.g., speeding, stop signs, etc.)?  Can the association impose a fine?  The association owns the streets.

Q. What penalties can an association impose for violating vehicle use rules (e.g., speeding, stop signs, etc.)?  Can the association impose a fine?  The association owns the streets.
A. In many cases, the board can call an owner to a hearing to consider disciplinary action, such as suspension of membership privileges and/or the imposition of a monetary penalty, and could collect those monetary penalties through a small claims action against the responsible owner in the event he or she fails to pay.  The board’s ability to take this action will depend largely upon the authority granted to the board under the bylaws, CC&Rs, enforcement policy, and/or schedule of monetary penalties.  As a practical matter, some community associations find  enforcement of vehicular rules  more difficult than others.  Gate-guarded communities, for example, may have an easier time identifying which owner is responsible for the conduct of a particular  driver .  Likewise, community associations that require residents  to register their vehicles in order to obtain a parking pass may find it easier to identify the owner of a particular vehicle.  —David A. Kline, Esq.

Rental Restrictions

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By Mary M. Howell, Esq. & David A. Kline, Esq

In 2011 the California legislature enacted SB 150, a bill championed by the California Association of Realtors, intended to deprive association owners of the ability to restrict rentals within their communities. This bill added section 4740 (formerly 1360.2) to the Civil Code. Owners within a common interest development are free to amend their CC&Rs to restrict rentals when it is reasonable to do so.

Since January 1, 2012, this right has been severely abridged. However, the law does not affect rental provisions that became effective before January 1, 2012.

The statute provides:

• Any amendments to CC&Rs which would prohibit rentals of dwellings within the development are effective only as to (a) owners who purchased after the amendment was recorded, and (b) prior owners who consent to be bound by the amendment.

• The amendment does not apply to commercial common interest developments. They may continue to enact rental restrictions without regard for the provisions of the new law.

• While it is not absolutely clear, it appears that only “prohibitions” are outlawed; lesser restrictions, such as 30-day minimums or requirements that only the entire dwelling may be rented, appear to be permitted under the law.

• The law includes a requirement that, prior to renting or leasing a dwelling, an owner “shall provide the association verification of the date the owner acquired title to the [dwelling] and the name and contact information of the prospective tenant or the tenant’s representative.”

• Because a new rental prohibition would create classes of owners with different rights, it may be cumbersome to enforce. It would also, in effect, delay the benefit of the restriction or the amelioration of the harm addressed by the restriction until every current homeowner opposed to the restriction sold his or her interest. This could undermine the stability of the community, rather than promote stability as covenants and restrictions are intended to do.

Certain types of rental restrictions are common, and some have found support in case law:

• In Colony Hill v. Ghamaty, a court of appeal upheld the application of a “single family residential use” restriction to prohibit room rentals (a “mini dorm”).

• In Mission Shores Association v. Pheil, the court approved the propriety of a CC&R provision which required a minimum 30-day rental period. (In the same case, the court also approved a portion of the amendment which allowed the association to evict a violating tenant.)

• In Fourth La Costa v. Seith, the court approved an amendment which required all leases to be in writing, and contain language binding tenants to the governing documents.

• While there are few reported cases, it would also appear that “occupancy restrictions” (that is, restrictions on the number of occupants who may reside in a dwelling), are also appropriate, provided such restrictions do not violate anti- discrimination guidelines. The usual acceptable number is 2 residents per bedroom plus 1.

• Restrictions based on “familial status” are hard to enforce, if the basis for enforcement is that the residents aren’t related “by blood or marriage.” Case law in the last 25 years makes it clear that a “family” consists of persons living together in the normal familial sense—sharing all rooms, sharing the responsibility for maintaining, paying the rent, etc. If (as the court in Colony Hill made clear) the use is not familial, but commercial (as when roommates are sought by advertisement, and certain portions of the homes are “off limits” to the residents), it is appropriate to conclude these are not “single family” uses.

Conclusion

If your community is serious about restricting rentals, it is wise to evaluate whether and how to proceed in light of Civil Code section 4740.

Rental restrictions should be contained in the CC&Rs, not in the rules; CC&Rs are entitled to a presumption of reasonableness under Nahrstedt, making them far easier to enforce in court actions. Further, since CC&Rs (not rules) are recorded, they provide actual and constructive notice to owners (that is, an owner is bound by the CC&Rs whether he knew about them at the time of purchase or not).

 

For more information on rentals, see also:

The Wheels of Justice Speeding Up! Bank of America v. Miami

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By David A. Kline, Esq.

A recent Fair Housing Act case might give community associations another tool to use in addressing bad actors who commit unlawful discrimination within the community.
The City of Miami sued Bank of America and Wells Fargo for predatory mortgage lending practices that caused a reduction in the City’s tax revenue. The City alleged the banks violated the Fair Housing Act by lending money to minority home buyers on less favorable terms (higher interest subprime loans) than similarly qualified non-minority applicants and homeowners with higher interest subprime loans were more likely to default on their mortgages. The banks were allegedly unwilling to renegotiate the terms of their predatory loans and foreclosed on many properties in minority neighborhoods. This reduced the value of the foreclosed homes and other homes in the neighborhoods, which caused a reduction in the City’s tax revenue. The complaint also alleged the City had to spend more money on services in these neighborhoods to reduce blight and address the dangerous conditions found in communities with high vacancy rates.
In response, the banks argued that the City was not a “proper party” to this lawsuit, because it was not the direct victim of the banks’ alleged discriminatory conduct. Essentially, the banks asserted that the City did not have standing to sue because the City was not within the Fair Housing Act’s “zone of influence.”  The banks also argued that the alleged damages suffered by the City were too far removed from the banks’ alleged discriminatory conduct for its wrongdoing to be considered the proximate cause of the City’s lost tax revenue.
In a 5-3 decision, the United States Supreme Court ruled that the City was an “aggrieved party” under the Fair Housing Act and that it has standing to sue, because Congress intended to confer standing broadly under the Fair Housing Act. The Court remanded the case to the lower court to determine whether there was a direct relation between the injury asserted and alleged discriminatory conduct. [1]
What does this mean and how far could such an expansive reading of standing extend to an association?
For example, if a community association learns of discriminatory conduct within its community, would the association be able to bring a Fair Housing Act complaint against the perpetrator? 
 
Suppose a homeowner harasses his neighbor because of the neighbor’s race, and the association’s board and management divert resources to investigate and remedy violations of its governing documents.  Could the association sue the harassing homeowner under the Fair Housing Act? 
 
What if a board member sexually harasses a resident during a board meeting?  Certainly, the association could be exposed to liability for that director’s conduct.  But, could the association distance itself from that director’s conduct by suing him for violating the Fair Housing Act?
 
Suppose the board of directors grants a request for a reasonable accommodation under the Fair Housing Act to provide a tenant with a disability exclusive use of a desirable parking space.  If an angry homeowner thereafter harasses that tenant, because of the accommodation, could the association sue the homeowner for violating the Fair Housing Act?
The answers to these questions are not yet known. However, in 2016, the Department of Housing and Urban Development (HUD) changed its regulations governing enforcement of the Fair Housing Act to clarify that housing providers, including associations, may (and perhaps in the view of HUD, should) be liable for failing to take appropriate action in response to alleged discrimination or harassment within their communities, and where such bad behavior is not necessarily a violation of the CC&R’s.
This indicates that the Fair Housing Act may be used as a sword (not a shield) by associations confronted with unlawful discrimination. In other words, the way seems clear for associations to commit resources and use the Fair Housing Act to combat discrimination, at least where the bad actors are members or residents of the association.

 

 


[1] In contrast, consider Dodaro v. Std. Pac. Corp., 212 U.S. Dist. LEXIS 47099 wherein plaintiff homeowners filed suit against developers who targeted poor borrowers, and facilitated subprime loans with accleration clauses, the failure of which loans allegedly led to the devaluation of all other homes in the community.  The developers sought and were granted dismissal of all claims. 

 

Unintentional Housing Discrimination

Supreme Court Says Unintentional Housing Discrimination is Against the Law: What Could This Mean for Your Community Association?

By David A. Kline, Esq.

On Thursday, June 25, 2015 the United States Supreme Court announced its decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc.

The Federal Government provides tax credits to housing developers for the construction of low income housing. Those tax credits are distributed to developers by the states. The Texas Department of Housing and Community Affairs (“Texas”) adopted a system of scoring proposed housing developments that gave additional points to developments in low income neighborhoods.

Inclusive Communities Project (“ICP”) sued Texas alleging that Texas violated the Fair Housing Act (“FHA”). The FHA, as amended, prohibits discrimination in housing because of race, color, religion, national origin, sex, disability, or familial status. ICP used statistical evidence to show that Texas’s scoring system resulted in a disproportionately high percentage of tax credits to developments in minority communities. Texas argued that its scoring system was not adopted “because of race” and does not violate the FHA.

ICP’s argument relies on a “disparate impact” theory of liability. Under that theory, a plaintiff need not show that a housing provider intended to discriminate. Rather, the plaintiff need only show that the housing provider’s facially neutral policy has a disproportionate adverse impact on members of a protected class. The burden would then shift to the housing provider to show that its policy is necessary to achieve its substantial, legitimate, nondiscriminatory interest that cannot be achieved by less discriminatory means.

Although the FHA does not explicitly state that plaintiffs may use this disparate impact, unintentional discrimination, theory to prove their case, numerous courts have allowed these claims. Nevertheless, confusion about this issue has led to inconsistent enforcement of the FHA from one presidential administration to the next.

Today’s decision by the Supreme Court clarifies that a housing provider may be held liable for violations of the FHA even if it did not intend to discriminate, so long as its policy has a disproportionate adverse impact on members of a protected class. This may embolden plaintiffs to file claims that might not otherwise have been filed.

How might this decision affect community associations?

Suppose an association adopts a pet restriction that is more restrictive for tenants than for owners. If that association is located in a community with a low level of minority homeownership, a claim could be made that the pet restriction has a discriminatory effect based on race.

Suppose an association adopts a rule that prohibits the use of skateboards in the common area. If a resident with children can show that children are more likely than adults to use skateboards, she might argue that the rule has a discriminatory effect based on familial status (i.e., the presence of children in the household).

Today’s decision could lead to more claims of unintentional discrimination. Associations should carefully review their governing documents with legal counsel to consider whether any restrictions might disproportionately affect members of a protected class, whether the association has a legitimate interest in enforcing such restrictions, and whether there are alternative nondiscriminatory means of achieving the association’s objectives.