WHAT IS HOA? EVERYTHING YOU NEED TO KNOW ABOUT HOA HOMEOWNER ASSOCIATIONS

Common Interest Developments In General

 

 

What is a “common interest development” or “CID”?

 

The term “common interest development” (or “CID”) describes a form of real estate where each owner holds exclusive rights to a portions of the property typically called a unit or lot, and shared rights to portions of the property typically called the common area. The most numerous forms of CIDs, and the focus of the Condominium Bluebook, are the condominium and the planned development. The two other types of CIDs, the stock cooperative and the community apartment, are far less common and are not discussed here. For additional information, see Civil Code §1351.

 

What is the historical background and conceptual basis of the common interest development?

 

The evolution of common interest developments was recently traced by the California Supreme Court in the case of Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 33 Cal.Rptr.2d 63, upholding the enforceability of pet restrictions. Pertinent portions of the Supreme Court’s historical review are reprinted here with minor textual modifications and without citation to authorities found in the decision itself:

“The term “condominium,” which is used to describe a system of ownership as well as an individually owned unit in a multi-unit development, is Latin in origin and means joint dominion or co-ownership. The concept of shared real property ownership is said to have its roots in ancient Rome.

“To divide a plot of land into interests severable by blocks or planes, the attorney for the land developer must prepare a declaration that must be recorded prior to the sale of any unit in the county where the land is a. The declaration, which is the operative document for the creation of any common interest development, is a collection of covenants, conditions and servitudes that govern the project. Typically, the declaration describes the real property and any structures on the property, delineates the common areas within the project as well as the individually held lots or units, and sets forth restrictions pertaining to the use of the property.

“Use restrictions are an inherent part of any common interest development and are crucial to the stable, planned environment of any shared ownership arrangement. The viability of shared ownership of improved real property rests on the existence of extensive reciprocal servitudes, together with the ability of each co-owner to prevent the property’s partition. One authority suggests that medieval building societies, an early form of shared real property ownership, had failed for lack of enforceable regulations.

“Restrictions on the use of property in any common interest development may limit activities conducted in the common areas as well as in the confines of the home itself. Commonly, use restrictions preclude alteration of building exteriors, limit the number of persons that can occupy each unit, and place limitations on, or prohibit altogether, the keeping of pets.

“Restriction on property use is not the only characteristic of common interest ownership. Ordinarily, such ownership also entails mandatory membership in an owners’ association, which through an elected board of directors is empowered to enforce any use restrictions contained in the project’s declaration or master deed and to enact new rules governing the use and occupancy of property within the project. Because of its considerable power in managing and regulating a common interest development, the governing board of an owners’ association must guard against the potential for the abuse of that power. As one authority observes, owners’ associations “can be powerful forces for good or for ill” in their members’ lives. Therefore, anyone who buys a unit in a common interest development with knowledge of its owners’ association’s discretionary power accepts “the risk that the power may be used in a way that benefits the commonality but harms the individual.” Generally, courts will uphold decisions made by the governing board of an owners’ association so long as they represent good-faith efforts to further the purposes of the common interest development, are consistent with the development’s governing documents, and comply with public policy.

“Thus, subordination of individual property rights to the collective judgment of the owners’ association together with restrictions on the use of real property comprise the chief attributes of owning property in a common interest development. As one court noted, “inherent in the condominium concept is the principle that to promote the health, happiness, and peace of mind of the majority of the unit owners since they are living in such close proximity and using facilities in common, each unit owner must give up a certain degree of freedom of choice which he [or she] might otherwise enjoy in separate, privately owned property. Condominium unit owners comprise a little democratic sub society of necessity more restrictive as it pertains to use of condominium property than may be existent outside the condominium organization.

“Notwithstanding the limitations on personal autonomy that are inherent in the concept of shared ownership of residential property, common interest developments have increased in popularity in recent years, in part because they generally provide a more affordable alternative to ownership of a single-family home. New York Times (Aug. 18, 1994, p. 23A, col. 1) reported that 32 million Americans are members of some 150,000 homeowners associations and predicted that between 25 to 30 percent of Americans will live in community associations by the year 2000. The July 1997 issue of Common Interest (a publication of Common Interest Advocates, a legislative advocacy and government relations firm based in Sacramento, CA.) estimates that six million Californians reside in about 30,000 CIDs within the state and that number continues to grow.”

 

What is the difference between a condominium project and a planned development?

 

The determination of whether a property is developed as a condominium project or a planned development is usually based on the physical characteristics of the buildings. Projects with only vertically-stacked units are always condominiums. Projects with only detached homes are almost always planned developments. Projects involving horizontally attached homes, or a combination of different home types, can be formed as either condominiums or planned developments.

The most significant difference between condominium projects and planned developments is the distinct nature of the individually owned and group owned portions of the property. The individually owned portion of a condominium is called the unit, and typically consists of interior space within a defined set of walls, floors and ceilings. Condominium owners also frequently have exclusive use of decks, patios, and parking areas. The individually owned portion of a planned development is called the lot and typically consists of a piece of land and everything on it. The common area in a condominium is usually all of the structural elements of the building(s) housing the units, and all land and exterior areas. The common area in a planned development is usually streets, open space, and recreational facilities.

 

Condominium projects and planned developments also differ with respect to the form of joint ownership of common area. Title to at least some portion of the common area in a condominium must be held by the owners in percentage shares, and, in most condominiums, title to all of the common area is held this way. By contrast, title to the common area in a planned development is almost always held by the homeowners association. For additional information, see Civil Code §1351.

 

 

Drawings and Documents

 

What are the governing documents?

The term “governing documents” is used as a general reference to the entire group of legally recognized paperwork that creates and controls a condominium project or planned development. The governing documents typically include a subdivision map and/or condominium plan, a Declaration of Covenants, Conditions and Restrictions (or "CC&Rs"), Articles of Incorporation (if the project is incorporated), Bylaws, and Rules.

 

 

What is the subdivision map and condominium plan?

The terms “subdivision map” and “condominium plan”, as well as the less common terms “final map” and “parcel map”, describe types of drawings that illustrate how a property is divided into units or lots. These drawings show the exact location and boundaries of each unit or lot, and of the common area. They are prepared by licensed land surveyors, reviewed by government agencies, and recorded with the county at the time a condominium project or planned development is formed. Once recorded, the drawings become connected to every deed and mortgage on every unit or lot within the property, and this connection makes changing the map or plan very difficult. There can be several maps or plans recorded at different times as new portions of a project are added. In some condominium projects, a condominium plan is attached to the CC&Rs rather than recorded separately.

 

 

What is in the Declaration of Covenants, Conditions and Restrictions (sometimes called simply the “Declaration” or the “CC”)?

CC&Rs describe the rights and obligations of the homeowners association and of each owner. CC&Rs are recorded with the county recorder of the county where the property is located, and automatically bind anyone who becomes and owner of the property after the CC&Rs are recorded. CC&Rs vary widely in content and length, but usually cover the following topics:

The boundaries of the common area and of each unit or lot;

The owner usage restrictions, typically including occupancy limitations, pet regulations, and alteration controls;

The maintenance responsibilities of the association and the individual owners;

The allocation of association operating costs among the owners, and the mechanism for collecting owner payments;

The insurance requirements for the association and each owner;

The dispute resolution procedure; and

The rights and protection of mortgage lenders.

CC&Rs are required for all condominiums and planned developments. They are prepared by the developer’s attorney, reviewed by a government agency (unless the project has fewer than five units or lots), and recorded with the county at the time a condominium project or planned development is formed. For additional information, see Civil Code §1353.

 

 

What is in the Articles of Incorporation and the Bylaws?

The Articles of Incorporation or “Articles” are usually short and often contain only the name of the homeowners association, the name of the association’s initial agent for the service of process (the person authorized to receive legal notices), and a statement that the association is a nonprofit mutual benefit corporation. Sometimes the Articles also include language about voting, directors, amendments, and dissolution of the association. Articles are required only when an association is incorporated. (Unincorporated associations sometimes have Articles of Association, but these are not required.) . Articles are prepared by the developer’s attorney, reviewed by a government agency (unless the project has fewer than five units or lots), and filed with the secretary of state. For additional information, see Corporations Code §§7130-7132.

 

The Bylaws describe the mechanics of association decisionmaking and management. Bylaws vary widely in content and length, but usually include the following:

 

Numbers and selection methods for officers and directors;

Notice, meting and voting procedures for owner and board decisions; and

Association record keeping and reporting requirements.

Although Bylaws are common for both incorporated and unincorporated associations, they are required only for certain incorporated associations. Bylaws are prepared by the developer’s attorney and reviewed by a government agency (unless the project has fewer than five units or lots) at the time a condominium project or planned development is formed. But unlike Articles and CC&Rs, Bylaws are not recorded or filed with any government agency, and this makes them easier to change. For additional information, see Corporations Code §7151.

 

 

How do the HOA Rules relate to the other governing documents?

The CC&Rs usually empower the homeowners association to adopt Rules, and give the Rules the same binding power as the other governing documents. The Rules often provide usage restrictions relating to alterations, signage, waste disposal, parking, pets, and recreational facilities. Where the same topics are discussed in the CC&Rs, the Rules may add to or explain the CC&Rs but cannot conflict with them. Association Rules are usually enacted after some of the units or lots have been sold and the owners have taken control of the association. They are not subject to any governmental review and do not need to be filed or recorded with any governmental agency.

 

 

Why are the governing documents binding?

The law provides that the use of real estate can be restricted when a document describing the restrictions is recorded with the county where the property is located. The restrictions “run with the land”, meaning they apply to each owner who acquires the property after the restrictions are recorded. The map or plan, and the CC&Rs, are different types of recorded restrictions which “run with the land”, and that is why they bind each owner of a unit or lot. The Articles, Bylaws, and Rules are not recorded, but derive their binding power from the recorded CC&Rs. With the Articles and Bylaws, this binding power arises because the CC&Rs makes each owner a member of the homeowners association, and the law makes each member of the association subject to the association’s Articles and Bylaws. With the Rules, the binding power arises because the CC&Rs specifically empower the association to enact additional binding restrictions.

 

 

What if a provision of the governing documents conflicts with law?

The resolution of a conflict between the governing documents and the law depends the intent of the governmental body that enacted the law. Where the apparently conflicting law contains a phrase like “notwithstanding the provisions of the Declaration” or “notwithstanding anything to the contrary in the governing documents” in its text, the intent to override is clear and the law controls. Where the apparently conflicting law contains a phrase like “unless otherwise provided in the Declaration” or “subject to the provisions of the governing documents” in its text, the intent not to override is clear and the governing document provision controls. Where the apparently conflicting law contains no clear indication of whether it is intended to supersede conflicting provisions in governing documents, intent must be determined from the language and context of the law, and from historical records of its enactment. Consult an attorney in these cases.

 

 

What if a provision of the governing documents is ambiguous or unclear?

The meaning of ambiguous or unclear language depends on the intent of its author(s). The intent can sometimes be determined by examining other parts of the document relating to similar issues or analogous situations. Where this approach fails, ambiguous or unclear language should be given its most reasonable interpretation in light of laws relating to similar issues or analogous situations, and local custom and practice (i.e. how governing documents in similar projects are written and how other similar associations operate.) Consult an attorney if a significant legal issue is at stake.

 

 

What if a provision of the governing documents seems unreasonable or unfair?

Provisions of governing documents are upheld unless they are arbitrary, impose burdens on some residents that substantially outweigh their benefits to other residents, or violate fundamental public policy. Consult an attorney if a provision of the governing documents does not seem to meet these standards. For additional information, see Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 33 Cal.Rptr.2d 63.

 

 

How can an owner get a copy of the governing documents?

Upon an owner’s written request, the association must provide copies of all of the governing documents. The association may charge of fee that does not exceed the actual costs of reproduction. Copies of maps, plans and CC&Rs can also be obtained from the county recorder and from most title companies. For additional information, see Civil Code §1368(b) and Corporations Code §7160.

 

 

How can the governing documents be changed or amended?

The procedure for amending governing documents is discussed at length in Condominium Bluebook. For additional information, see Government Code §§66469 et. seq. (maps), Civil Code §§1355-1357 (CC&Rs), Corporations Code §§7810-7820 (Articles), and Corporations Code §7150 (Bylaws).

 

 

Who is the Declarant referred to in the governing documents, and why does the Declarant seem to have special privileges?

 

The Declarant is the original developer of the project, and he/she/it has special privileges and rights because he/she/it had virtually complete control over the content of the documents when they were prepared.

 

 

Should provisions relating to developer voting and annexation rights be removed from the governing documents?

 

It is advisable for homeowners associations to amend their governing documents to remove the developer-specific provisions as soon as the project is completely built out and sold. For additional information, see Civil Code §1355.5.

 

 

Ownership and Possession

 

 

Ownership and Control In General

 

 

What portions of a condominium project are individually owned?

 

In a condominium project, the individually owned area is called the unit. The exact physical location of each condominium unit within a particular project is shown on the recorded map or condominium plan for that project. The map or plan, and/or the CC&Rs, will also contain a definition of the term “unit” as it is used for that particular project, listing the elements of the building that are part of the unit. These definitions vary significantly from project to project, and it is unwise to apply generalizations or assumptions. Instead, read the definition with the following questions in mind:

 

Does the unit include any exterior surfaces such as roofing, siding, or foundation?

What portions of the interior walls does the unit include: the whole wall (i.e. both sides and everything in between), half the wall (i.e. everything from one side to a point halfway to the other side), one finished surface (i.e. only the wallboard or plaster on one side), or just the finish (i.e. the paint or paper)? Note that some unit definitions distinguish perimeter walls (i.e. walls between units, or between a unit and the common area) from partition walls (i.e. walls between rooms in the same unit), or structural walls (i.e. walls that help hold up the building) from non-structural walls (i.e. those that simply divide rooms). Where these wall-type distinctions are made, the portions of the wall that are part of the unit will vary depending on wall type.

What portions of the floors and ceilings does the unit include: the entire floor or ceiling, all portions up to a midpoint, the finished portion (i.e. ceiling plaster or sheetrock, finished wood flooring), or just the finish (i.e. paint or carpet)? Here again, some definitions distinguish floors and ceilings between units, or between a unit and the common area, from floors and ceilings between levels of the same unit.

What portions of the windows and doors does the unit include: the entire window or door, or only glass and screens? Note that some definitions distinguish interior doors from exterior doors. Does the definition include window and door frames? Does it include window and door hardware?

Does the unit include all of the fixtures and appliances located within it? Note that the term “fixtures”, when used in this context, encompasses cabinetry, lights, electrical outlets, sinks, showers, and tubs.

What portions of the plumbing, electrical, heating and air conditioning systems are part of the unit: all elements that serve only the unit, or only elements visible from within the unit?

Does the unit include any decks, balconies, or patios, and if so, how does the definition describe the boundaries of these areas? Note that even if the unit does not include these areas, they may be assigned as exclusive use common area as discussed below.

 

What portions of a planned development are individually owned?

 

In a planned development, the individually owned area is called the lot and typically consists of a piece of land and everything on it. The exact physical location of each lot within a particular project is shown on the recorded map for that project. Where there are walls or fences that sit on the border of two lots, ownership is considered to be shared unless the CC&Rs provide otherwise. Note that the map and/or CC&Rs for planned developments sometimes give neighbors and even the general public the right to cross a private lot (a type of “easement”). For additional information, see Civil Code §1351.

 

 

Who owns the common area?

 

Title to common area can be held by the homeowners association or by the owners in percentage shares as “tenants in common”. The decision is made by the developer at the time the governing documents are prepared, and is very difficult to change later. To determine who owns the common area in an association, refer to the CC&Rs. The method of common area ownership has no significant consequences in a properly insured association. Note that in condominium projects, title to at least some common area must be held as tenants in common. The percentage held by each owner does not determine that owner’s usage rights or cost responsibility. For additional information, see Civil Code §§1351 and 1362.

 

 

What is exclusive use common area and restricted common area?

 

The terms “exclusive use common area” and “restricted common area” are used interchangeably. They refer to portions of a condominium project or planned development that are not within the defined boundaries of a unit or lot, but are intended to be used exclusively by one owner. Technically, exclusive use or restricted common area is part of the common area owned either by the homeowners association or by all of the owners, but one particular owner holds a type of easement which gives him/her exclusive usage rights. The easement is permanent, and cannot be taken away by the association or by the other owners. Decks, patios, parking spaces, and storage spaces are often assigned as exclusive use or restricted common area on the recorded plan or map, in the CC&Rs, or in the deed conveying the lot or unit to its first owner. The law automatically assigns all elements designed to serve only one particular unit or lot as exclusive use common area, but the automatic assignments operate only if they do not conflict with the governing documents. For additional information, see Civil Code §1351.

 

 

What do the terms “percentage interest” and “common interest” mean?

 

The terms “percentage interest” and “common interest” are used only when the common area is jointly owned by the individual owners (rather than by the association). In these cases, terms “percentage interest” and “common interest” refer to the percentage share of common area owned by a particular owner. An owner’s “percentage interest” or “common interest” does not determine that owner’s usage rights or cost responsibilities.

 

 

What is a “party wall” in a planned development?

 

The term “party wall” in a planned development usually means a wall, fence, or other building element that sits on the border of two or more lots. Sometimes the CC&Rs will define “party wall” more broadly so that it includes any building element that is within a prescribed distance of the lot border. Where party walls exist, the CC&Rs will usually allocate responsibility for maintenance, impose restrictions on alterations, and provide access rights for maintenance. When the CC&Rs are silent on any of these issues, general rules of law apply. These laws are complex and beyond the scope of the Condominium Bluebook. For additional information, consult an attorney.

 

 

Partition and Combination

 

 

What does the term “partition” mean?

 

When used in a legal context in connection with jointly owned real estate, the term “partition” refers to a court-supervised process where the jointly owned real estate is sold and the proceeds divided among the owners. Contrary to common usage, partition never involves a physical division of one parcel of real estate into multiple parcels. Partition is the law’s remedy when changed circumstances or disagreements prevent co-owners from jointly managing their shared property, and in most joint ownership arrangements, any owner can force a partition at any time. But although the common areas of condominiums and planned developments are often jointly owned, the law prohibits partition unless the project has become substantially damaged or obsolete. For additional information, see Civil Code §1359.

 

 

Can an owner in a condominium or planned development split off a home from the complex and sell it free of the homeowners association and the restrictions in the governing documents?

 

By the time a condominium or planned development home is sold, documents have been recorded with the county government which firmly bind it to the rest of the project. A condominium unit in a multi-unit, vertically-stacked building can never be split off, but if the building is substantially damaged the law and the governing documents sometimes allow the entire project to be sold and the proceeds divided. A condominium or planned development home located in a structure containing no other homes, or attached to other homes on a horizontal plane, can be split off, but only with the approval county government as well as the percentage of owners and lenders required by the governing documents.

 

 

Can individual elements of a unit or lot, such as a particular room, be sold to or exchanged with another owner?

 

The boundaries of units and lots within a condominium project or planned development appear on the recorded map or plan, and cannot be changed without amending that map or plan. The amendment must be prepared by a licensed surveyor. If the map or plan to be amended is recorded separately from the CC&Rs, the amendment must be reviewed by a governmental agency, signed by all owners and all lenders with an interest in the project, and recorded. The signature requirement is especially difficult to fulfill because it requires the cooperation of every lender that has a mortgage on any of the units or lots in the complex (including those not directly affected by the amendment), and lenders are generally not anxious to cooperate in this process. If the map or plan to be amended is recorded only as an exhibit to the CC&Rs, the amendment will need to be approved only by the percentage of owners required by the CC&Rs, and the lenders with mortgages on the directly affected units or lots. The approval of other lenders, and of a governmental agency, is required only if the CC&Rs so state. For additional information, see Government Code §§66469 et. seq.

 

 

Can exclusive use or restricted common areas, such as parking spaces or storage spaces, be sold to or exchanged with another owner?

 

If the exclusive use or restricted common area is assigned to a particular unit or lot on a map or plan recorded separately from the CC&Rs, the sale or exchange would require an amendment of the map or plan as described in the previous answer. If the exclusive use or restricted common area is assigned to a particular unit or lot only in the CC&Rs and/or the initial deed conveying the unit or lot, and is not assigned on the map or plan, the sale or exchange will require an amendment to the CC&Rs and/or a new deed. In these cases, the owners directly involved with the sale or exchange will need the approval and cooperation of their mortgage lenders. The CC&Rs may also require approval and cooperation of some or all of the other owners and their mortgage lenders.

 

 

If an owner owns two units or lots, can he/she combine them into one?

 

The ability of an owner to physically combine units or lots (i.e. join them together with doorways, stairs etc.) will be determined by the alteration provisions of the CC&Rs and the local building and planning codes. In most cases, the owner will need to get association approval for these types of physical alterations as well as a building permit from a governmental agency. The ability of an owner to legally combine units or lots (i.e. make them into a single unit or lot) will be determined by specific CC&R provisions relating to unit or lot combination or changing boundaries. Even if the CC&R requirements can be satisfied, combination will require an amendment to the map or plan as described above in connection with the sale or exchange of a portion of a unit or lot.

 

 

Non-Owner Access

 

 

Must an owner provide the HOA with access to his/her home?

 

Most CC&Rs state that the homeowners association has the right to enter any unit or lot whenever necessary to fulfill the association’s duties. Among the duties that would justify entry is common area maintenance, and verification of an owner’s compliance with owner maintenance requirements and alteration restrictions, and pet rules. Often, the CC&Rs will require that the association provide advance notice of the entry except in an emergency. When the CC&Rs are silent on these issues, both the right of entry, and the requirement for advance notice, would be implied.

 

 

Under what circumstances can an owner gain access to a neighbor’s property to make repairs or improvements to his/her own property?

 

Most CC&Rs state that each owner has the right to enter a neighbor’s unit or lot, and all common area, whenever such entry is necessary to maintain the owner’s unit or lot, and provided advance notice is given or there is an emergency. When the CC&Rs are silent on the issue, the entry right would be implied. The right does not exist when the purpose is to facilitate owner alterations or improvements rather than necessary maintenance.

 

 

Use of Common Area

 

 

Is each owner entitled to use the common area, regardless of his/her ownership and assessment percentage?

 

Each owner in a condominium project or planned development is equally entitled to use all common area (other than exclusive use or restricted common area) regardless of ownership or assessment percentage.

 

 

Are an owner’s guests and tenants allowed to use common area recreational facilities?

 

An owner’s guests and tenants have the same common area usage rights as the owner unless the governing documents specifically provide otherwise.

 

 

Under what circumstances can the HOA can refuse to allow an owner access to recreational facilities?

 

A homeowners association may charge fees for the use of recreational facilities and refuse access without payment, provided the charge applies equally to all owners and is not specifically prohibited by the governing documents. Such fees can be initiated and adjusted by the board unless the governing documents specifically require an owner vote.

 

The association may also temporarily remove an owner’s recreational facilities usage privileges as discipline for a violation of the governing documents. This type of discipline is permitted only if (i) the governing documents do not specifically prohibit it, (ii) the board has adopted the discipline policy in advance, (iii) notice of the policy has been provided to all of the owners in advance, and (iv) the violating owner is given notice of the violation and a board hearing before the recreational facilities usage privileges are removed.

 

 

If an owner has rented out his/her home and does not live within the complex, can he/she still use the recreational facilities?

 

If there is no provision in any of the governing documents prohibiting a non-resident owner from using the recreational facilities while his/her unit or lot is rented, he/she may continue to use them. If there is such a provision, the law is currently unclear as to whether the prohibition can be enforced. For additional information, see Liebler v. Point Loma Tennis Club (1995) 40 Cal.App.4th 1600, 47 Cal.Rptr.2d 783 (enforcing a restriction), and MaJor v. Miraverde Homeowners Assn. (1992) 7 Cal.App.4th 618, 9 Cal.Rptr.2d 237 (invalidating a restriction).

 

 

Rental Restrictions

 

 

Can there be any restrictions on an owner’s right to rent his/her home?

 

Rental restrictions in governing documents are legal provided they are uniformly applied to all owners, do not discriminate against particular group of potential renters, and can be shown to serve some legitimate purpose. Note that rental restrictions may affect the owners’ ability to obtain mortgage loans from some lenders. For additional information, see City of Oceanside v. McKenna (1989) 215 Cal.App.3d 1420, 264 Cal.Rptr. 275.

Association Powers and Decisionmaking

 

 

Limits of Association Power

 

 

Do HOA decisions need to adhere to any standards?

 

Each homeowners association decision must adhere to the following standards:

 

It must be within the scope of the association’s authority under the governing documents and the law;

It must be based upon a reasonable investigation;

It must be intended to serve the best interests of the association and the owners as a group;

It must be made in good faith; and

It must be reasonable in light of the information available at the time the decision is made.

Additional standards may apply for specific types of decisions such as owner discipline or alteration approvals. Where the association has formally established policies or procedures, they must be uniformly applied and followed. But the fact that the association has permitted or approved a certain activity or alteration by a particular owner at one time does not mean that the association must permit or approve that same activity by the same or a different owner at a later time. In evaluating an association decision for compliance with these standards, the courts will defer to the board’s authority and presumed expertise. For additional information, see Lamden v. La Jolla Shores Clubdominium Homeowners Assn. (1999) 99 C.D.O.S. 6358; Clark v. Rancho Santa Fe Association (1989) 216 Cal.App.3d 606, 265 Cal.Rptr. 41; Cohen v. Kite Hill Community Assn. (1983) 142 Cal.App.3d 642, 191 Cal.Rptr. 209; Deane Gardenhome Assn. v. Denktas (1993) 13 Cal.App.4th 1394, 16 Cal.Rptr.2d 816; and Laguna Royale Owners Assn. v. Darger (1981) 119 Cal.App.3d 670, 134 Cal.Rptr.136. See also Civil Code §1378 (regarding alteration approvals.)

 

 

Is there a government agency with authority over HOA activities?

 

There is no governmental agency with authority to oversee homeowners associations. Association duties and standards must be enforced by owners and lenders through the court system or through some alternative dispute resolution process such as mediation or arbitration.

 

 

How can an owner change or challenge an HOA decision?

 

The owner should begin by attempting to discuss the matter with the president, a director, committee chair or property manager. If this attempt does not yield satisfactory results, the owner should attend a board meeting or call an owner meeting to discuss the problem with the other owners. If the owner wishes to pursue the matter further, he/she should consult an attorney. See Civil Code §1357.100 et. seq. regarding each owner’s right to challenge new or changed Rules, and Civil Code §1378 (regarding appeals of alteration approval decisions.)

 

 

When the HOA needs to get legal advice in order to respond to an owner, can it charge the owner for attorney’s fees?

 

A homeowner’s association is not entitled to recover its attorneys fees from an owner unless it prevails in a court proceeding or arbitration involving the enforcement of the governing documents. For additional information, see Civil Code §1354(f).

 

 

Association Reporting Requirements

 

 

What records must the HOA maintain and how can owners access these records?

 

The law imposes strict record keeping and reporting requirements on homeowners associations, and the governing documents often impose even more stringent requirements. Some of the records and reports must be distributed to the owners automatically on a prescribed schedule, and the remainder must be available to owners upon request. The list of items the association is required to distribute with the budget changes frequently, so the following summary should be used for general guidance only:

 

 

Category (1)—Financial Information

Budget: The association must prepare a pro forma operating budget each year which projects the income and expenses for the upcoming year, and the amount needed in reserve for future upkeep and eventual replacement of the major parts of the project which the association maintains. The exact content required for the pro forma operating budget are listed in Civil Code §1365(a). Either the entire pro forma operating budget, or a summary of it, must be distributed to all owners each year. If only a summary is distributed, it must include a statement that the full budget is available upon request. The budget must also include a statement of whether the association anticipates any special assessments, and a statement describing how the reserve needs were calculated.

Assessments: The association must an assessment statement in a precise form that is described in Civil Code §1365.2, along with a description of its policy for collecting delinquent assessments.

Annual Report: The association must prepare a financial report each year which includes an income and expense statement, a balance sheet, a statement of changes in financial position, and notification of the location of the owner name and address list. If the association has collected less than $75,000 during the year, it must notify all owners that the annual report is available upon request; if the association has collected less than $75,000 during the year, it must retain an accountant to review the report and then automatically provide it to all owners. For more information, see Corporations Code §8321 and Civil Code §1365(b).

Reserve Study: The association must prepare a reserve study every three years which includes a list of the major association-maintained components with a remaining life of less than 30 years, and estimates of (i) the remaining life of each component, (ii) the costs of maintaining and replacing these components, and (iii) the annual contribution required to fund these costs. The reserve study must be based upon a board inspection.

 

Category (2)—Decisions

Meeting Minutes: The association must prepare minutes of each owner and board meeting, and provide copies of the minutes to any owner upon request. A notice that the board meeting minutes are available for review must be included with the pro forma operating budget each year. For additional information, see Corporations Code §8320 and Civil Code §1363.05.

Monetary Penalties: If the association imposes monetary penalties or fees, it must provide a schedule to all owners each time a penalty or fee is established or adjusted. For additional information, see Civil Code §1365.5(d).

Litigation: If the association is contemplating litigation against the developer, it has various additional reporting requirements. See Civil Code §§1365.5(d), 1375, and 1375.1 for content.

 

Category (3)—Membership

Address List: The association must maintain a list of owner names and addresses. The list need not include telephone numbers. Owners must be notified of the location of the list as part of the annual report, and a copy of the list must be provided to owners upon request. For additional information, see Corporations Code §§8321 and 8330.

 

Category (4)—Other Information

Alteration Approvals: The association must provide a statement of its alteration approval policies and procedures.

Dispute Resolution:The association must provide a reminder about dispute resolution procedures.

 

What documents and information must the HOA provide to prospective purchasers?

 

Homeowners associations are not required to provide or disclose any information directly to prospective purchasers of units or lots, but are required to provide a variety of documents to selling owners so that these owners can meet seller disclosure requirements. For additional information, see Civil Code §1368, and Kovich v. Paseo Del Mar Homeowners’ Assn. (1996) 41 Cal.App.4th 863, 48 Cal. Rptr.2d 758.

 

 

Association Structure

 

 

What is the difference between an incorporated HOA and an unincorporated HOA?

 

The law allows a homeowners association to be either incorporated or unincorporated. An incorporated association has a legal identity that is separate from that of its members, just as Micorsoft has a legal identity that is separate from its shareholders. Unlike Microsoft, which is a for profit corporation, an incorporated homeowners association is a non-profit mutual benefit corporation which means that its powers are limited to those normally associated with a homeowners association, and it is exempt from certain governmental fees and taxes.

 

Traditionally, homeowners associations have been incorporated to protect owners from responsibility for association debts, losses and liabilities. But recent laws have extended most of these protections to owners of unincorporated associations provided the associations have proper insurance. (For additional information on these protections, see Civil Code §§1365.7 and 1365.9, and Corporations Code §21100.) Under current law, the advantages of incorporation are some (very limited) additional protection from owner liability, ease of opening association accounts with certain banks and vendors, and qualification of the units or lots for mortgage loans from lenders that require an incorporated association. Balanced against these advantages are the costs of forming the corporation, the burden of annually filing a form with the Secretary of State, and additional procedural formalities such as having officers and directors, and conducting formal meetings.

 

An unincorporated association can be incorporated by its owners at any time. The process of incorporation involves amending the governing documents, preparing Articles of Incorporation, and filing with the Secretary of State.

 

 

How are HOA powers distributed between the owners, the board, the committees, the officers, and the manager?

 

In general, the distribution of power and authority within the homeowners association is determined by the governing documents, but the law contains some restrictions on how the governing documents can distribute this power. The law presumes that most association power and authority will be exercised by the board without the direct involvement of the owners. Where the governing documents simply give the association power to do or approve something without specifically requiring owner approval, the power can be exercised by the board without owner approval.

 

The law imposes very few restrictions on how much power the documents can give the board. The following is a list of the few acts which always require owner approval:

 

Amending the CC&Rs (see Civil Code §§1355 and 1356, and note there is a limited exception allowing the board to amend the CC&Rs to remove developer preferences);

Amending the Bylaws to (i) increase the number of owners necessary to hold owner meetings (the “quorum”) (see Corporations Code §7512(a)), (ii) change the number of directors on the board (see Corporations Code §7151(b), or (iii) change a provision allowing director election by cumulative voting (see Corporations Code §7615(a));

Increasing regular assessments more than 20% (see Civil Code §1366(b) and note that this limitation does not apply in the emergency circumstances listed there);

Imposing special assessments during one year that total more than 5% of the budgeted expenses for that year (see Civil Code §1366(b) and note that this limitation does not apply in the emergency circumstances listed there); and

Removing a director without cause (see Corporations Code §7222, and note that “cause” as defined in Corporations Code §7221).

In practice, most governing documents also require owner approval for a variety of major decisions including changing the items which the association is responsible to maintain, changing the owners’ assessment percentages, changing the unit or lot boundaries, and imposing leasing or resale restrictions.

 

The board has complete control over all committees, officers and managers. This means that the board decides who will serve in these capacities, and what authority they will have, subject only to restrictions in the governing documents. The board retains the power to override the decision of any committee, officer and manager. For additional information, see Corporations Code §7210-7214.

 

 

Can the owners override a decision by the board, a committee, an officer or the manager?

 

The owners cannot override a board, committee, officer or manager decision. If the owners are unhappy with a board decision, they can convene a meeting, vote to remove one or more directors, and hope the replacement directors make a more satisfactory decision. If the owners are unhappy with a committee, officer, or manager decision, they can attempt to convince the board to overrule it or, if that does not work, vote to change the board. Alternatively, one or more owner could challenge any board, committee, officer or manager decision through litigation or arbitration on the basis that the decision was not reasonable, made in good faith, and/or in compliance with formally established policies or procedures.

 

 

How should HOA decisions be made?

 

The first step in homeowners association decisionmaking is determining whether the course of action under consideration would be reasonable and in the best interests of all owners. If this question can be answered affirmatively, the next step is to review the governing documents and the Condominium Bluebook with the following questions in mind:

 

Is a particular action or decision required under the governing documents and/or the law?

Is a particular procedure for making the decision required under the governing documents and/or the law?

Does the decision under consideration require an owner vote?

Questionable action should be reviewed by an attorney. If the action could have a significant impact on one or more owners, it is wise to get a written opinion of counsel before taking action upon which the board can rely in the event of a legal challenge. A legal opinion may protect the board from liability for an erroneous decision by allowing it to assert reasonable reliance on the advice of counsel as a defense. But remember that the failure of an association to follow the advice of counsel or its own internal decision-making procedures will make inappropriate action vulnerable to a legal challenge.

 

 

Who can write checks and sign contracts for the association?

 

The law states that the signatures of at least two directors, or of one officer and one director, must be required for withdrawals from the association reserve account(s). Withdrawal requirements for other association accounts are usually set in the governing documents, but if they are not, the requirements can be established by the board.

 

The decision of whether the association should enter into a particular contract is made by the board unless the governing documents require owner approval, or unless the board has delegated the decision to an officer, committee, or manager. The law is currently unclear regarding how many officers, and which officers, must sign the contract in order for it to be valid. Until this issue is settled by the courts, it is prudent to have the contract signed by two officers: (i) the president or vice president, and (ii) the secretary or chief financial officer.

 

The law provides that a contract signed by an officer can be binding even if there was never a proper association decision to enter into it. To avoid liability for non-approved contracts, the board should exercise extreme care in selecting officers, and provide written notice to all of its vendors that no contract should be considered valid unless the vendor receives a board resolution authorizing the agreement. A sample board resolution is provided in The Condominium Bluebook. For additional information, see Civil Code §1365.5(b) and Corporations Code §7214.

 

 

Can directors and/or officers be paid for their service?

 

While it is legal to pay directors and officers for their service, it is not a good idea. Under the law, volunteer directors and officers of properly insured homeowners associations face no personal liability for their decisions absent intentional fraud or self-dealing. Paid directors and officers can face personal liability for bad judgement and unintentional mistakes. For additional information, see Code of Civil Procedure §425.15, Corporations Code §7231.5, and Civil Code §1365.7.

 

 

Owner Meetings and Decisions

 

 

What is the difference between a regular owner meeting and a special owner meeting?

 

A regular owner meeting is one held on a regular schedule prescribed in the governing documents. Most governing documents require one regular meeting (the “annual meeting”) each year. A special owner meeting is one that is not required by the governing documents, but rather has been convened for a special purpose.

 

 

Who can convene a special owner meeting?

 

A special owner meeting can be convened by the board, the chairman of the board (if any), the president, or any group consisting of at least 5% of the owners.

 

 

What kind of notice is required for an owner meeting?

 

Both regular and special owner meetings require a written notice to all owners. The notice must include the place, time and date of the meeting, a general description of the matters to be discussed, and, in cases where directors are to be elected, the names of those who have been nominated (if any) prior to the notice date. It may be mailed, hand delivered, or in some cases transmitted electronically. Posting the notice in the common area is not sufficient. If the notice is mailed by first class registered or certified mail, or if it is hand delivered, it must be given 10-90 days before the meeting; if it is mailed by any other method, it must be given 20-90 days before the meeting. Special and complex requirements apply when notice is transmitted electronically, and still more rules apply when members will be able to participate in the meeting electronically. Notice is not required when the meeting is actually the continuation of another meeting that was adjourned within the previous 45 days as long as the time and place of the continuation meeting had been announced at the original meeting.

 

When a group of owners, acting independently from the board, wishes to convene a special meeting, they must send a written request to the board chairman (if any), president, vice president, or secretary, and that person is required to notify all of the owners of the meeting within 35-90 days of the request. The date of the special meeting is set by the board.

 

Owner meeting notices are provided in The Condominium Bluebook. For additional information on owner meeting notices, see Corporations Code §7511 and Civil Code §1363(e).

 

 

What happens if an owner meeting is held without proper notice?

 

Decisions made at an owner meeting held without proper notice are valid only if all of the following are true: (i) enough owners (a “quorum”) were present to allow decisions to be made at a properly noticed meeting, (ii) none of the owners at the meeting objected to the improper notice at the beginning of the meeting, and (iii) every owner who did not attend the meeting signs a waiver of notice or an approval of the meeting minutes. For additional information, see Corporations Code §7511(e).

 

 

Can the owners vote on matters not mentioned in the meeting notice?

 

Generally, at a regular owner meeting, the owners can vote on matters not mentioned in the meeting notice. An exception applies when less than 1/3 of the voting power is present. At a special owner meeting, the owners cannot vote on matters not mentioned in the meeting notice. For additional information, see Civil Code §1363(e) and Corporations Code §§7511-7512.

 

 

How many owners must be present for a quorum?

 

The governing documents generally specify the minimum amount of owner voting power (the “quorum”) that must be present for decisions to be made at an owner meeting. In certain cases, participation through electronic means is the same as physical presence at the meeting. The law does not specify a minimum or maximum quorum requirement, but does provide that if the governing documents permit a decisions with less than a 1/3 quorum, the only matters that can be voted on while less than 1/3 of the voting power is present are those mentioned in the meeting notice. The law also provides that if the governing documents fail to specify a quorum requirement, it will automatically be set at 1/3 of the voting power. For additional information, see Corporations Code §§7512.

 

 

Are there procedural rules for conducting an owner meeting?

 

The law requires that owner meetings be conducted “in accordance with a recognized system of parliamentary procedure or any parliamentary procedures the association may adopt” (Civil Code §1363(d)). Suggested owner meeting procedures are provided in The Condominium Bluebook.

 

 

What should an owner do if he/she cannot attend an owner meeting?

 

An owner who cannot attend an owner meeting should give another person a proxy, which is a written form authorizing the other person to attend and vote for the absent owner. Proxy and Proxy Revocation forms are provided in The Condominium Bluebook. For additional information, see Corporations Code §7613.

 

 

Under what circumstances can an owner decision be made without a meeting?

 

Any matter that could be decided at an owner meeting can also be decided without a meeting except the election of directors by cumulative voting. To make owner decisions without an owner meeting, written ballots must be distributed to all owners. The ballots must contain the following information for each proposed action:

 

A description of the action;

A place to indicate approval or disapproval;

The response deadline;

The number of ballots that must be received by the deadline to satisfy the association’s quorum requirements; and

The percentage of approvals required for passage.

Owners must be given a reasonable time to return their ballots. Once returned, a ballot cannot be changed or revoked. A ballot is form is provided in The Condominium Bluebook. For additional information, see Corporations Code §§7513, 7514, and 7516.

 

 

How much voting power does each owner have?

 

A particular owner’s voting power is determined by the governing documents. In most homeowners associations, each owner has one vote of equal weight regardless of his/her ownership or assessment percentage, or the value or size of his/her unit or lot. If voting power is not specified in the governing documents, the law presumes that each owner has one vote of equal weight. For additional information, see Corporations Code §7610.

 

 

Are all owner decisions made by a majority vote?

 

The level of owner voting power required for approval is determined by the governing documents, and tends to vary depending on the type of decision. Most governing documents list a group of decisions requiring greater than majority approval, specify the level of approval required for each, and state that all other owner decisions are made by a majority. In instances where the governing documents are not specific, a majority approval requirement is presumed.

 

When interpreting voting requirements in governing documents or in the law, it is important to pay close attention to wording. When a matter requires the approval of a specified percentage, or the majority, “of all owners” or “of the total voting power of the association”, it means that the voting power cast for approval must be measured against the total voting power of all owners including those who did not cast votes. When a matter requires the approval of a specified percentage, or a majority, “of the owners” (i.e. without using the word “all”), or “of the votes cast”, it means that the voting power cast for approval is only measured against the total voting power cast. For more information, see Corporations Code §5033 and 5034.

 

 

What rules apply to owner meeting minutes?

 

The law requires that the association prepare and maintain minutes of all owner meetings, and that these minutes be made available to owners for inspection on written demand at any reasonable time for any reasonable purpose. The governing documents usually provide that the secretary is responsible to prepare the minutes within a prescribed number of days following the meeting. For additional information, see Corporations Code §8320.

 

 

Director Election and Terms

 

 

Must the HOA have directors?

 

Incorporated associations are legally required to have directors. Unincorporated associations need not have directors.

 

 

Can the governing documents require directors to meet specific qualifications?

 

The governing documents can require that directors have certain qualifications provided the requirement is reasonable. In most associations, directors are must be owners. In some associations, directors must be resident owners.

 

 

How are directors nominated and elected?

 

The governing documents usually specify nomination procedures for director candidates. For associations with fewer than 500 owners, the only requirement imposed by law is that the procedures be reasonable. (See Corporations Code §§7521-7524 for requirements applicable to associations with 500 or more members.) In fact, it is not necessary to have any formal nomination procedures if the association allows any owner to make nominations during the meeting at which the directors will be elected. But if any nominations have been made prior to the date the meeting notice is sent to the owners, the nominees must be identified in the notice.

 

Election procedures are also specified in the governing documents. While some associations elect directors by simple majority vote of the owners, many associations use cumulative voting as explained below.

 

 

What is cumulative voting?

 

In an election of directors using cumulative voting, each owner is allowed to cast a total number of votes equal to the number of directors to be elected, and may combine or “cumulate" those votes in any way he/she wishes. Thus if there are five seats on the board to be filled at the election, each owner will be entitled to five votes, but will not be required to vote for five candidates. As an alternative to casting one of his/her votes for each of five candidates, an owner can cast five votes for one candidate, or three votes for one candidate and two votes for another, and so on. The purpose of cumulative voting is to give each owner a stronger likelihood of electing at least one or two directors who share his/her views.

 

The law allows cumulative voting only if it is specifically authorized in the governing documents. Even then, cumulative voting will not be automatic, and will be triggered only if, prior to the voting, at least one owner states that he/she intends to cumulate his/her votes. For additional information, see Corporations Code §7615.

 

 

How long do directors serve?

 

The length of the directors’ terms is usually specified in the governing documents and, by law, cannot exceed four years. If the governing documents do not specify term length, the law provides that it will be one year. It is not necessary for all directors to have terms of the same length, or for all directors’ terms to expire in the same year. Frequently, the governing documents provide for staggered terms, so that fewer than all of the board seats are open at one time. For further information, see Corporations Code §7220

 

 

How can a director be removed from the board before the end of his/her term?

 

A director may be removed by owner vote at any time. The owners do not need a reason for the removal. The number of owner votes needed to remove a director is determined as follows:

 

If the governing documents allow cumulative voting, a director can be removed only if the total number of votes of the owners opposing removal, if cumulated and all cast in favor of the director, would be insufficient to elect him/her (see Corporations Code §7222(b)(1) for additional details);

If the governing documents provide for voting in classes or subgroups, a director elected by a particular class or subgroup can be removed only by vote of that class or subgroup (see Corporations Code §7222(b)(2)-(3) for additional details);

If neither of the first two paragraphs apply, and the association has fewer than 50 owners, director removal requires a majority of the total voting power of the association (rather than just a majority of the votes cast in the removal election); and

If neither of the first two paragraphs apply, and the association has 50 or more owners, director removal requires a majority of the voting power cast in the removal election.

A director may also be removed by the other directors, but only if there is cause for removal. Appropriate cause for removal by the other directors includes mental incapacity and felony conviction. In addition, the governing documents may allow the board to remove directors for missing a specified number of meetings. For additional information, see Corporations Code §7221(a).

 

 

If a director resigns or is removed, how is the vacancy filled?

 

The method of selecting a director to fill a vacancy following a resignation or removal is usually prescribed in the governing documents. If the governing documents are silent on the issue, a vacancy created by resignation is filled by board vote, and a vacancy created by removal is filled by owner vote (regardless of whether the removal was executed by the owners or by the board). For additional information, see Corporations Code §7224.

 

 

Director Meetings

 

 

Who can call a board meeting?

 

In general, the governing documents will prescribe the frequency of regular board meetings, but allow the board to established the exact time and place. The governing documents usually also provide that the time and place of a regular meeting can be changed, or a special meeting can be scheduled, by the chairman of the board (if any), the president, or a specified number of directors. . If the documents are silent on the issue of who may call a special board meeting, the law provides that the chairman of the board (if any), the president, the vice president, the secretary, or any two directors may do so. Owners who are not directors or officers cannot call board meetings. For additional information, see Corporations Code §7211(a).

 

 

What type of notice of board meetings must be given to directors and owners?

 

For a regular board meeting occurring at a time and place specified in the governing documents, no notice need be given to directors or owners unless notice is required by the governing documents. In other non-emergency situations, owner notice is always required, and director notice is usually required (see Corporation Code §7211(a) for a list of the rare occasions when director notice is not required). In emergency situations as defined in Civil Code §1363.05(h), owner notice is never required.

 

Where owner notice is required, it must be given at least four days in advance, and the governing documents may require a longer notice period. The notice must be posted in a prominent place within the common area, or delivered personally or by mail to each unit or lot. The notice may be included in a newsletter or other general mailing. Notices are provided in The Condominium Bluebook. For additional information on owner notice requirements, see Civil Code §1363.05(g).

 

Where director notice is required, it may be given four days in advance by first-class mail, or 48 hours in advance by telephone, voice mail, fax, electronic mail or personal delivery. Each director can waive his/her notice rights. For additional information on director notice requirements, see Corporation Code §7211.

 

 

How many directors must be present for a quorum?

 

The governing documents generally specify the minimum number of directors (the “quorum”) that must be present for decisions to be made at a board meeting. The law will not permit this number to be below 1/5 of the total number of directors, and also will not permit it to be below two. When the governing documents do not specify a director quorum, a majority of directors shall be required for a quorum. A majority vote of the directors attending a meeting can make decisions unless the governing documents impose a higher voting requirement. Directors may attend meetings by conference telephone and still be considered present for quorum and voting purposes. For additional information, see Corporations Code §§7511.

 

 

Are owners entitled to attend board meetings?

 

Owners are entitled to attend all board meetings except executive sessions. The board is permitted to hold an executive session only to discuss litigation, contracts with non-owners, owner discipline (in which case the subject owner may attend), and personnel matters. If only part of the meeting will be an executive session, owners may attend the remainder. If the entire meeting will be an executive session, owners may not attend but are still entitled to advance notice. Any gathering (including a conference telephone call) where a majority of directors discuss any item of business scheduled to be heard by the board is considered a director meeting, and triggers owner notice and attendance rights. For additional information, see Civil Code §§1363.05.

 

 

Must owners be permitted to speak at board meetings? Can their speaking time be limited?

 

Owners must be permitted to speak at all board meetings except executive sessions, but the board may establish a reasonable time limit for owner speeches. For additional information, see Civil Code §§1363.05.

 

 

Are there procedural rules for conducting a board meeting?

 

The law does not require formal procedures during board meetings. Nevertheless, board meetings are likely to be more productive, and less frustrating for participants, if formal procedures are adopted and followed. Suggested owner meeting procedures are provided in The Condominium Bluebook. A suggested agenda for board meetings is also provided.

 

 

Under what circumstances can a board decision be made without a meeting?

 

Board decisions cannot be made without a meeting except in emergency situations when all of the following are true:

 

Immediate attention is required;

The circumstances could not have been reasonably foreseen;

It impracticable to provide owner notice; and

All directors have signed a written approval of the decision.

A director approval form is provided in The Condominium Bluebook. For additional information, see Corporations Code §7211 and Civil Code §1363.05.

 

 

What rules apply to board meeting minutes?

 

The law requires that the association maintain minutes of all director meetings except executive sessions, that the minutes be prepared (at least in draft form) within 30 days of the meeting, and that the association provide copies of the minutes to any owner upon request. The governing documents usually state that the secretary is responsible for preparing the minutes. For additional information, see Corporations Code §8320 and Civil Code §1363.05(d). A sample board resolution is provided in The Condominium Bluebook.

 

 

Officers and Committees

 

 

Must the HOA have officers?

 

Incorporated associations are legally required to have at least (i) a chairman of the board or president, (ii) a secretary, and (iii) a chief financial office or treasurer, but, unless prohibited by the governing documents, one person may hold all of these offices. Unincorporated associations need not have officers. For additional information, see Corporations Code §7213(a).

 

 

How are the officers elected and removed?

 

Officers are chosen by the board unless the governing documents specifically provide for election by the owners. Officers chosen by the board may be replaced by the board at any time. For additional information, see Corporations Code §7213(b).

 

 

What types of decisions can an officer make?

 

The power and authority of each officer is determined by the governing documents, or, if the documents are silent, by the board. Regardless of how power and authority is delegated among the officers, the board can override the decision of any officer on any matter. For additional information, see Corporations Code §7210.

 

 

How do committees fit into the HOA organization?

 

Most governing documents authorize the formation of one or more specific committees, but the board has the authority to create committees even if that power is not specifically mentioned in the governing documents. Unless the documents specify the size of the committee, the qualifications required of the members, and the method of selecting and removing the members, these matters can be determined by the board. Committee recommendations are not binding on the board, and committee decisions may be overridden by the board. The law prohibits certain matters from being delegated to a committee, and these matters are listed in Corporations Code §7212(a). For additional information, see Corporations Code §§7151(c)(4) and 7210.

 

 

Managers

 

 

Must an HOA have a professional manager?

 

Some governing documents require professional management, or state that an owner vote (or even the approval of mortgage lenders) is required to discontinue professional management. Absent these provisions, professional management is not required, but it is generally advisable, particularly for larger associations. The law allows any association to retain a professional manager. For additional information, see Corporations Code §7210.

 

 

What services do professional managers typically provide?

 

Professional managers offer a wide variety of services to homeowners associations including accounting, budgeting, record keeping, assessment collection, bill payment, meeting coordination, and common area maintenance. Associations choose from among the services available, and enter into a contract with the manager describing the scope of work. The management contract should also include the fee, the duration of arrangement, and the circumstances under which the arrangement can be terminated early. Some governing documents limit the duration of management agreements, or require specific early termination provisions. A sample management agreement is provided in The Condominium Bluebook.

 

While the law allows almost any association function to be delegated to a professional manager, most governing documents list certain association functions that cannot be delegated. Non-delegable functions typically include borrowing money, levying assessments, making capital expenditures in excess of budgeted amounts, and imposing discipline for violation of the governing documents. Regardless of what functions are delegated, and regardless of the content of the management agreement, the board retains the duty to supervise the manager and the authority to override any decision. For additional information, see Corporations Code §7210.

 

 

How is a professional manager selected?

 

The board has the authority to select the manager and determine content of the management contract, but it may appoint a committee to make recommendations. Managers of homeowners associations are not required to be licensed but must provide an extensive disclosures to the association. For additional information, see Civil Code §1363.1.

 

 

What restrictions apply to a manager’s handling of HOA funds?

 

The law imposes stringent requirements on managers that handle homeowners association funds to prevent commingling and fraud. For additional information, see Civil Code §1363.2.

Budgets, Reserves, and Assessments

 

 

Budgeting and Regular Assessments

 

 

What is the difference between operating funds and reserve funds?

 

The term “operating funds” describes money collected for annually recurring expenses such as insurance, management, common area utilities, and janitorial service. The term “reserve funds” describes money collected for the repair and replacement of major components of the property which the homeowners association maintains.

 

 

What is an HOA budget and who creates it?

 

The pro forma operating budget is a document listing the expected income, operating fund needs, and reserve fund needs, along with the basis for the calculation of the reserve fund needs. The exact content requirements for the budget are listed in Civil Code §1365(a). A new budget must be prepared and circulated to all owners each year, but it can be based upon the budget from the previous year. The board is responsible for preparing the budget, but it can delegate this responsibility to an officer, committee, or professional manager provided the board retains final authority.

 

 

How are regular assessments or “dues” established and changed?

 

Regular assessments must be based upon the funding needs projected in the budget. In general, the board is responsible for determining the amount of the regular assessments, but it can delegate this responsibility to an officer, committee, or professional manager provided the board retains final authority. Some governing documents require owner approval for changes in regular assessments. Even where the governing documents do not require owner approval, increases of 20% or more must be approved by a majority of owners. All owners must be notified of an increase in regular assessments by first-class mail 30-60 days before the increase takes effect. For additional information, see Civil Code §§1366 and 1366.1.

 

 

Who determines each owner’s share of assessments?

 

The governing documents always specify how assessments are allocated among the owners, and usually require a high percentage of the owners and the mortgage lenders to approve any change in the allocation. The allocation is established by the developer at the time the governing documents are prepared, and is reviewed by a governmental agency for projects consisting of five or more units or lots. There are no legal grounds for an owner to challenge the assessment allocation based upon fairness or equity.

 

 

Other Types of Assessments

 

 

What is a special assessment, and how is the amount and payment schedule established?

 

A special assessment is an assessment for an association expense that was under-budgeted or not budgeted. It can be made payable in a single installment or in multiple installments. In general, the board has the power to impose small special assessments and to determine the payment schedule, but some governing documents require owner approval for all special assessments. Even where the governing documents do not require owner approval, special assessments during one year that total more than 5% of the budgeted expenses for that year require owner approval except in emergency circumstances. The allocation of a special assessment among the owners is determined by the governing documents. All owners must be notified of a new or increased special assessment by first-class mail 30-60 days before it is due. For additional information, see Civil Code §1366(b), which includes a definition of emergency circumstances.

 

 

What is a personal reimbursement assessment and how is the amount established?

 

A personal reimbursement assessment is an assessment against only one owner. The most common type of personal reimbursement assessment is one imposed to reimburse the association for a cost which is a specific owner’s individual responsibility under the governing documents. For example, if an owner or the owner’s guest or tenant damages the common area, the association could levy a personal reimbursement assessment for the repair cost. Another type of personal reimbursement assessment is one imposed as a fine or penalty. Fines and penalties can only be imposed if a schedule had been distributed to all owners in advance. Often, the governing documents require that an owner be given a board hearing before a personal reimbursement assessment is imposed. For additional information, see Civil Code §§1363(g) and 1367(b) and (c).

 

 

Can the HOA charge for parking, use of recreational facilities, and other services, and is there an upper limit on these changes?

 

The board may impose usage and service fees as long as they do not conflict with the governing documents. The amount of the charges must be reasonable.

 

 

Assessments Disputes and Collection

 

 

What can an owner do if he/she disagrees with the amount of an assessment?

 

Under most circumstances, if an owner disagrees with the amount of an assessment, he/she can pay it under protest and then challenge the assessment through a court action or arbitration. The exact requirements for challenging an assessment in this way are described in Civil Code Section 1366.3. If the owner does not follow these procedures, or simply does not pay the assessment, he/she may lose the right to challenge it and be subject to a collection action and/or foreclosure. For additional information, see Civil Code §§1354 and 1367.

 

 

Can an owner reduce his/her assessment by offsetting money the HOA owes him/her?

 

An owner may not withhold assessments owed to the association on the grounds that the owner is entitled to recover money or damages from the association for some other obligation. For additional information, see Park Place Estates Homeowners Assn. v. Naber (1994) 29 Cal.App.4th 427, 35 Cal.Rptr.2d 51.

 

 

What happens if an owner doesn’t pay an assessment?

 

If an owner does not pay a regular or special assessment, he/she is subject to a variety of fees and penalties including non-judicial foreclosure, a four-month procedure culminating in an auction-like sale of the delinquent owner’s unit or lot to pay the assessment and the collection costs. In a non-judicial foreclosure, there is no trial or hearing. The procedure can be handled by an attorney or by a specialized assessment collection service.

 

If an owner does not pay a personal reimbursement assessment levied to reimburse the association for common area damage, non-judicial foreclosure is also possible provided the governing documents authorize it. If an owner does not pay a personal reimbursement assessment levied for any other purpose, the association must collect its funds through a judicial process.

 

The association is required to have a written statement of policy for collecting delinquent assessments, and to distribute that statement to all owners annually. The policy should require immediate and aggressive action every time an assessment is delinquent. This approach avoids the awkwardness of responding to owners who request additional time to pay, and creating a perception of leniency or inconsistent treatment. Moreover, in cases where the delinquent owner has also defaulted on his/her mortgage, quick action decreases the likelihood that a mortgage foreclosure will prevent the association from collecting the unpaid assessment(s). Sample association notices relating to delinquent assessments are provided in The Condominium Bluebook. For additional information, see Civil Code §§1367, 1368, and 1365(d).

 

 

Handling Association Funds

 

 

What accounting procedures are required for HOAs?

 

The law requires that a homeowners association segregate its reserve funds from its operating funds and perform a quarterly financial review that includes:

 

A reconciliation of the operating and reserve accounts;

A comparison of the actual reserve revenue and expenses to the budgeted reserve revenues and expenses;

An Analysis of the bank statements for operating and reserve accounts; and

An Analysis of the income and expense statements for operating and reserve accounts.

Some governing documents increase the scope or frequency of this review.

 

The law also requires preparation and distribution of a budget and financial report each year as described under the heading “Association Reporting Requirements” above, and a reserve study every three years.

 

Reserve funds can be used only for repair, restoration, replacement or maintenance of the portions of the property that the association is obligated to maintain, or litigation involving these items. In some circumstances, the association can borrow reserve funds to cover operating expenses, but the reserve funds must generally be replenished within one year.

 

The board is responsible for fulfilling the association’s accounting responsibilities, but it can delegate this responsibility to an officer, committee, or professional manager provided the board retains final authority. For additional information, see Civil Code §§1365 and 1365.5, and Corporations Code §§8320-8322.

 

 

Can an owner withdraw his/her share of HOA funds when he/she sells?

 

No owner is entitled to withdraw funds from the association in connection with the sale of his/her unit or lot.

 

 

Does an HOA need to pay income tax?

 

Homeowner associations are required to pay federal and state income tax only if they generate income from sources other than the collection of assessments and fees from the owners, and then only if the income from these other sources, offset by the expenses associated with generating it, exceeds $100. The only non-assessment income most associations generate is interest on association funds. Federal and state income tax is owed on this income to the extent it exceeds $100 per year, but most associations avoid paying tax by carrying forward any potentially taxable income by applying it to the next year’s budget. For additional information, see Internal Revenue Code §528 and Rev. & Tax. Code §23701t.

 

 

Maintenance and Alterations

 

 

Maintenance Obligations

 

 

What portions of the property are individual owners obligated to maintain?

 

In condominium projects and planned developments, maintenance obligations are not necessarily determined by ownership. In other words, the fact that a particular element or area is individually owned does not necessarily mean that it is individually maintained. To determine whether an element or area is individually maintained, begin by reading the sections of the governing documents that specifically discuss maintenance obligations. The maintenance sections may or may not refer back the ownership sections (such as the definition of the condominium unit). If responsibility for the element or area is not clear, attempt to determine the author’s intent by analogy to similar elements or areas that are mentioned in the documents. If the documents provide no clues as to the authors intended allocation of responsibility, determine ownership of the element or area and allocate responsibility based on ownership.

 

In most condominium projects, individual owners are obligated to maintain the following elements of the property:

 

Everything included within the definition of the unit as explained under the heading “What portions of a condominium are individually owned?” above;

The glass, screens, moving frame, and hardware of windows (even if they do not fall within the definition of the unit);

All doors, door frames, and door hardware (even if they do not fall within the definition of the unit); and

The finished wall surfaces of storage spaces assigned as exclusive use or restricted common area.

Where exterior areas such as decks, patios or yards are included as part of a condominium unit or assigned as exclusive use or restricted common area, individual maintenance obligations vary widely, and no generalizations are possible.

 

In most planned developments, individual owners are obligated to maintain the following elements of the property:

 

All interior elements and areas of the homes;

All portions of the plumbing, electrical, heating and air conditioning systems serving the homes;

All foundations and structural elements of the homes (but not roofing and siding);

All glass, screens, moving frame, and hardware of windows; and

All doors, door frames, and door hardware; and

All patios and decks (except exterior paint on decks).

As discussed below, owner maintenance obligations change when an element or area is damaged by negligence, or as a consequence of the malfunction of an element the owner is not responsible to maintain.

 

 

What standards apply to owner maintenance, and what happens if an owner fails to meet them?

 

The governing documents usually include a minimum standard for owner maintenance such as the statement “each owner shall maintain the elements of the property for which he/she is responsible in a condition which does not impair the value or desirability of other units or lots”. Most governing documents also provide that if an owner fails to satisfy his/her maintenance requirements, the association may do so and assess any related expense against the responsible owner as a personal reimbursement assessment. It is advisable (and required by some governing documents) that the association provide a written warning, an opportunity to correct the problem, and a board hearing, before undertaking a repair for an owner.

 

 

Who maintains things that are on the border of two or more lots?

 

Maintenance responsibility for elements on the border of lots within a planned development (often called “party walls”) is determined by the governing documents or, where the documents silent on the issue, by general rules of law. In most cases, each of the bordering lot owners is responsible for a percentage of the cost which reflects the extent to which the element serves his/her lot. Any of the bordering lot owners can undertake necessary maintenance, and recover the appropriate share of the costs from the other bordering lot owners.

 

 

What portions of the property is the HOA obligated to maintain?

 

The allocation of maintenance responsibilities between the individual owners and the association is usually determined by the governing documents, and varies widely from project to project. A step-by-step procedure for determining responsibility is discussed above under the heading “What portions of the property are individual owners obligated to maintain?”

 

In most condominium projects, the association is obligated to maintain the following elements of the property:

 

All exterior elements including siding and roofing (but not windows and doors);

All foundations and other structural elements;

All landscaping, exterior lighting, drives, and walks;

All interior common areas including lobbies, hallways and stairs (except stairs connecting levels within units);

All portions of the plumbing electrical, heating and air conditioning systems serving more than one unit; and

All fire protection alarms and equipment.

Where exterior areas such as decks, patios or yards are included as part of a condominium unit or assigned as exclusive use or restricted common area, association maintenance obligations vary widely, and no generalizations are possible.

 

In most planned developments, the association is obligated to maintain the following elements of the property:

 

All common area;

All exterior surfaces of homes, including roofing, siding, trim, decks, balconies, exterior stairs, railings, window frames, and door frames;

All fences and exterior, nonstructural walls;

All landscaping on each lot; and

All fire protection alarms and equipment except smoke detectors within homes.

As discussed below, association maintenance obligations change when an element or area is damaged by negligence, or as a consequence of the malfunction of an element that an owner is responsible to maintain. For additional information relating to damage caused by wood-destroying pests, see Civil Code §1364(b).

 

 

Is the HOA required to perform regular inspections of the portions of the property it maintains?

 

A homeowners association is required to regularly inspect the portions of the property it maintains as part of the reserve study process. For additional information, see Civil Code §1365.5(e).

 

 

Who is responsible for damage cause by a negligent or intentional action or inaction?

 

Each Owner is responsible for maintenance necessitated by the negligent or intentional action or inaction of his/her guests, employees and contractors, the occupants of his/her unit (including tenants), and the guests, employees and contractors of these occupants. The association is responsible for maintenance necessitated by the negligent or intentional action or inaction of its employees and contractors.

 

 

What is the “point of origin”, and how does it effect maintenance responsibilities?

 

The term “point of origin” refers to the first event that sets in motion the series of other events leading to a maintenance need. The point of origin of the maintenance need determines responsibility for its cost. For example, if the bathtub of a condominium unit overflows, the owner is responsible for all resulting damage to other units and to the common area. This is true because the point of origin of the damage was either a malfunction of the faucet or drain (elements for which the owner is responsible), or an occupant’s negligence in allowing the tub to overflow (an act for which the owner is responsible).

 

 

Improvements and Alterations

 

 

Under what circumstances does an owner need HOA approval for an improvement or alteration?

 

Condominium governing documents usually require association approval for improvements and alterations which:

 

Change the appearance of any exterior area;

Change any interior common area (except entirely separated exclusive use common areas such as storage closets);

Impair structural integrity; or

Interfere with plumbing, electrical, heating, or air conditioning service to other units or the common area.

Planned development governing documents usually require association approval for improvements and alterations which:

 

Change any common area;

Involve the construction of new structures or additions, including fences, walls, pools, spas, balconies, patios, patio enclosures, screens, tents, awnings, window air conditioners, exterior shutters, exterior antennas, or exterior wiring;

Change the appearance of the exterior elements of existing structures including paint, siding and roofing;

Change the appearance of existing landscaping visible from the common area or other lots;

Obstruct the view from another lot or from the common area; or

Interfere with the water supply, sewage or drainage systems.

The law imposes general requirements on HOA alteration approval procedures (Civil Code §1378), and specific restrictions on approval requirements and procedures for “for sale” or “for rent” signs (see Civil Code §712), U.S. flags (Government Code §434.5), satellite dishes (see Civil Code §1376), solar panels (see Civil Code §714 and 714.1), and handicapped access (see Civil Code §1360(a)(2)).

 

 

Can the HOA legally restrict the display of a sign by an owner?

 

Since a condominium project or planned development is private property, there is no constitutional protection for freedom of expression. This means that sign restrictions and prohibitions in governing document provisions are generally valid and enforceable. The only types of signs that cannot be prohibited are signs advertising a unit or lot for sale or rental, including related signs providing directions to the property, and the owner or agents name, address and telephone number. The association may impose reasonable restrictions on the location, size, dimensions, and design of these signs. No restrictions can be imposed on the display of the U.S. flag. For additional information, see Civil Code §§712 and 713, and Government Code §434.5.

 

 

What is the procedure for obtaining HOA approval for an improvement or alteration?

 

Most governing documents contain detailed procedures for the submittal, consideration, and approval of proposed alterations and improvements. Where the governing documents do not contain these procedures, or where the procedures are incomplete, the board should develop new or supplemental procedures and express them in a written resolution or Rule. If formal approval procedures are not established, or if they are not strictly followed, the association may be prohibited from enforcing its architectural guidelines. (See Deane Gardenhome Assn. v. Denktas (1993) 13 Cal.App.4th 1394, 16 Cal.Rptr.2d 816.) Alteration approval is a responsibility of the board, but it may delegate this responsibility to an officer, committee, or professional manager provided it retains final authority.

 

Civil Code §1378 now imposes the following requirements on HOA alteration approvals:

 

The association must provide a fair, reasonable, and expeditious procedure for making its decision. The procedure shall be included in the association’s governing documents. The procedure shall provide for prompt deadlines. The procedure shall state the maximum time for response to an application or a request for reconsideration by the board of directors.

A decision on a proposed change shall be made in good faith and may not be unreasonable, arbitrary, or capricious.

A decision on a proposed change shall be consistent with any governing provision of law, including, but not limited to, the Fair Employment and Housing Act (Part 2.8 (commencing with Section 12900) of Division 3 of Title 2 of the Government Code.

A decision on a proposed change shall be in writing. If a proposed change is disapproved, the written decision shall include both an explanation of why the proposed change is disapproved and a description of the procedure for reconsideration of the decision by the board of directors.

If a proposed change is disapproved, the applicant is entitled to reconsideration by the board of directors of the association that made the decision, at an open meeting of the board. This paragraph does not require reconsideration of a decision that is made by the board of directors or a body that has the same membership as the board of directors.

The association shall annually provide its members with notice of any requirements for association approval of physical changes to property. The notice shall describe the types of changes that require association approval and shall include a copy of the procedure used to review and approve or disapprove a proposed change.

Architectural approval procedures should also contain the following elements:

 

A list of the items required before the association will consider the application, which would typically include:

A description of the proposed alteration, including, as appropriate, its shape, height, width, elevation, materials, color, location and such further information as may be necessary to allow the association to evaluate it fully;

A set of construction drawings prepared by a licensed architect and/or engineer; and

A certificate by a licensed architect or engineer stating that the alteration (i) will not impair the structural integrity of any part of the property, and (ii) will not interfere with any mechanical system;

A provision allowing the association to make any reasonable request for additional information or details;

Guidelines regarding the time limit for completion of the work, obtaining an extension, and consequences for failing to complete the work on time; and

Guidelines regarding licensing, bonding, and insurance of a contractor hired to complete approved alterations.

 

What standards and principles must the HOA follow in approving or disapproving an alteration or improvement?

 

Homeowners associations are granted the same wide latitude ordinarily given government agencies in their decision making. It is appropriate for a homeowners association to base its decision regarding a proposed alteration or improvement on subjective criteria provided that the decision is:

 

Based upon a reasonable investigation;

Intended to serve the best interests of the association and the owners as a group;

Reasonable in light of the information available at the time the decision is made;

Fair and non-discriminatory;

Made in good faith; and

Within the scope of the association’s authority under the governing documents and the law.

The fact that the association has permitted or approved a certain activity or alteration by a particular owner at one time does not mean that the association must permit or approve that same activity by the same or a different owner at a later time. For additional information, see Lamden v. La Jolla Shores Clubdominium Homeowners Assn. (1999) 99 C.D.O.S. 6358; Clark v. Rancho Santa Fe Association (1989) 216 Cal.App.3d 606, 265 Cal.Rptr. 41; Cohen v. Kite Hill Community Assn. (1983) 142 Cal.App.3d 642, 191 Cal.Rptr. 209; Deane Gardenhome Assn. v. Denktas (1993) 13 Cal.App.4th 1394, 16 Cal.Rptr.2d 816; and Laguna Royale Owners Assn. v. Darger (1981) 119 Cal.App.3d 670, 134 Cal.Rptr.136. See generally Civil Code §1378.

 

 

What happens if owner makes alterations or improvements without required HOA approval?

 

When an owner begins alterations or improvements without required association approval, he/she is subject to a variety of penalties under the governing documents and the law. At a minimum, the association can order the owner to immediately cease all work and restore any altered areas to their original state. If the owner does not comply, the association can perform the restoration and assess the costs against the owner. The board has the power to undertake these actions, but may delegate responsibility to an officer, committee, or professional manager provided the board retains final authority. If the association does not act, it may find it more difficult to enforce similar restrictions in the future.

 

Each association should have written policies for discovering and responding to violations of alteration restrictions. These should include:

 

The right to enter any unit or lot, following reasonable notice, to inspect all construction, whether or not approval was required or granted;

A requirement that the association notify the owner of the violation in writing, and order the owner to cease work and restore the altered area within a prescribed time period;

A procedure for the owner to obtain a hearing before the board if the owner wishes to argue that approval was not required, or that the work complies with an approval that the owner obtained; and

A requirement that if the owner fails to remedy the situation by the deadline, the association must undertake the work and assess the costs against the owner.

 

Defects and Disclosures

 

 

What can an individual owner do about construction defects?

 

When an owner discovers construction defects in a portion of the property which the association is obligated to maintain, he/she should report the problem to the manager or, if there is no manager, to an association officer or director. The association is obligated to repair the damage under the governing documents, regardless of whether the developer is ultimately responsible. The board is required to exercise prudent business judgement in deciding whether to attempt to recover repair costs from the developer.

 

When an owner discovers construction defects in a portion of the property which the owner is obligated to maintain, he/she must repair the damage under the governing documents. The repair obligation exists regardless of whether the developer is ultimately responsible, or whether a previous owner or real estate agent has violated disclosure laws. If the owner fails to repair, the association may do so and assess the costs against the owner. The owner may be entitled to recover his/her repair costs from the developer, a previous owner, or a real estate agent, and should consult an attorney.

 

 

What should the HOA do if there are construction defects in the project?

 

A homeowners association should consult an attorney as soon as it discovers construction defects. Failing to act quickly could result in the loss of recovery rights. The law contains extensive requirements and procedures for construction defect dispute resolution. For additional information, see Civil Code §§1365.5(c) and (d), 1368(a)(4), 1368.4, 1375, and 1375.1.

 

 

What disclosures must be made to a prospective purchaser when there are construction defects in the project?

 

The seller of a unit or lot is required by law to disclose all material defects in the property, including defects located in the common area, and defects located in other units or lots if they affect the unit or lot being sold. The disclosure requirements extend to all defects of which the seller is aware or should be aware, including construction defects. Additional disclosure requirements apply when construction defect litigation has been commenced, or is under consideration. For additional information, see Civil Code §§1102 et. seq., 1134, and 1368.

 

Any real estate agent involved in the sale is also required to disclose any defects of which he/she is aware or should be aware, and is further required to conduct a reasonably competent and diligent visual inspection. For additional information, see Civil Code §§2079 et. seq.

 

Homeowners associations are not required to provide or disclose construction defect information to prospective purchasers of units or lots. For additional information, see Kovich v. Paseo Del Mar Homeowners’ Assn. (1996) 41 Cal.App.4th 863, 48 Cal. Rptr.2d 758

 

 

Insurance and Liability

 

 

Property Insurance

 

 

Who is responsible for insuring the homes and the common areas for property damage?

 

The governing documents contain detailed property insurance requirements. In condominium projects, these typically require that the association obtain property damage insurance (sometimes called casualty insurance) for everything located on the property except the contents of the units. These policies usually cover damage to interior walls, floors and ceilings within units, but do not cover damage to cabinetry, plumbing and electrical fixtures, appliances, wall and floor coverings, and furniture. The individual owners are responsible for insuring the contents of their units, and are required to carry this insurance in some projects.

 

In planned developments, the governing documents usually require the association to insure all portions of the property which it is obligated to maintain. But in some cases, the individual owners are required to insure everything on their lots even though the exterior surfaces of the homes are maintained by the association.

 

 

Are there minimum requirements for the amount of property insurance that must be carried?

 

The law does not require a particular amount or type of property insurance. Most governing documents include a minimum insurance requirement by stating that the limits of coverage shall not be less than the full current replacement cost of the structures. In other cases, the documents allow the board to determine the appropriate amount of insurance. Regardless of what the documents say, the board is empowered to exceed any minimum insurance requirement, and must use prudent business judgement in determining the amount and type of insurance.

 

 

Is earthquake insurance required?

 

Most governing documents do not require earthquake insurance, and it is not required by law. Since earthquake insurance is expensive and typically involves a large deductible, its benefits are debatable, and a board should not face liability for choosing not to obtain it.

 

 

How can an owner find out what insurance the HOA is carrying?

 

Homeowners associations are required to provide a summary of the terms of all of their insurance policies to each owner each year, and to provide complete copies of the policies upon request. For additional information, see Civil Code §1365(e)(1).

 

 

What happens if there is not enough property insurance to cover repair costs?

 

In general, when insurance proceeds are insufficient to pay repair costs, the association must levy a special assessment to cover the shortfall. But most governing documents describe a procedure for dissolving the association and selling the property following a very large uninsured or underinsured loss. These procedures are intended to provide an alternative to a special assessment so large that most owners could not pay it.

 

 

Bonds

 

 

What are managing agent bonds and fidelity bonds, and when are they required?

 

Managing agent bonds and fidelity bonds are a form of insurance for the theft or misappropriation of funds. This type of insurance is not required by law, but is required by some governing documents. It is advisable for large associations to obtain this type insurance unless their funds are handled by a professional manager who already has adequate bonding or coverage.

 

 

Liability and Liability Insurance

 

 

Under what circumstances can HOA directors and officers be held liable for damages resulting from their service?

 

The law provides that a volunteer director or officer cannot be held liable for damages resulting from his/her service to the association if he/she performs his/her duties (i) in good faith, (ii) in a manner which he/she believes to be in the best interests of the association, and (iii) with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use in similar circumstances. At the risk of oversimplifying this standard, the idea is to protect honest directors and officers from liability for mistakes unless their actions are self-interested or unreasonable. Director are entitled to rely on information and opinions provided by the association’s officers, committees, and hired experts.

 

To provide additional liability protection to directors and officers, most governing documents state that the association will indemnify them absent gross negligence, intentional misconduct, or fraud. Indemnity means that the association will pay for an attorney to defend the director or officer, and will pay the damages if the defense fails. Most governing documents require the association to carry director and officer (“D&O”) liability insurance for these costs, and such insurance is always a good idea. The law states that if the D&O insurance meets statutory minimums, the director or officer cannot be held personally liable even if the damages exceed the insurance coverage. For additional information, see Corporations Code §§7231.5 and 7237, and Civil Code §1365.7.

 

 

Under what circumstances can an owner be held liable for personal injuries that occur in another home or in the common area?

 

If the association is incorporated, an individual owner can never be held responsible for personal injuries that occur in another owner’s home or in the common area. If the association is unincorporated, an individual owner can be held responsible only if the association is responsible and unable to satisfy the claim, and then only if the association does not carry liability insurance meeting the statutory minimums. For additional information, see Civil Code §1356.9.

 

 

Under what circumstances can an owner be held responsible for unpaid HOA debts?

 

If the association is incorporated, an individual owner can never be held responsible for its debts. If the association is unincorporated, an individual owner can be held responsible only if the debts are unrelated to construction or repair. For additional information, see Corporations Code §21100.

 

 

Who is responsible for insuring the HOA, the owners, the directors and the officers, for liability?

 

The governing documents contain detailed liability insurance requirements. These typically mandate liability insurance for the association and its directors and officers. The owners are responsible for insuring against their own liability.

 

 

Are there minimum requirements for HOA liability insurance?

 

The law does not require a minimum amount of liability insurance, but most governing documents specify minimum policy limits. The law does state that if certain statutory policy limits are met, the individual owners cannot be held responsible if the damages exceed the coverage. For additional information, see Civil Code §§1365.7 and 1365.9.

 

 

Usage Restrictions

 

 

Can the HOA limit the type or number of people who can live in a home?

 

Statutory law explicitly prohibits housing discrimination based upon sex, race, color, religion, ancestry, national origin, and disability, and the California Supreme Court, finding that this list of protected classes is “illustrative rather than restrictive”, has held that discrimination against children, and against families because they have children, is also prohibited. The law against discrimination is so broad that any occupancy restriction could be interpreted as discriminatory, including limits on the maximum number of occupants in a home. The only limitations that are clearly valid and enforceable are those that track the language of local and state health codes, and those that establish a project as senior citizen housing. For additional information, see Civil Code §§51-53, and Marina Point v. Wolfson (1982) 30 C.3d 721, 180 Cal.Rptr. 496.

 

 

Can an owner be forced to give up his/her pet?

 

Governing documents which were created or amended after January 1, 2001 must allow each owner to keep at least one pet, and cannot prohibit an owner from keeping a pet he/she already has. Beyond this basic requirement, however, pet restrictions in governing documents are valid and enforceable, and an owner in violation of the restrictions can be forced to give up his/her pet. See Civil Code §1360.05 and Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 33 Cal.Rptr.2d 63.

 

 

Who is responsible for a tenant’s compliance with the governing documents?

 

An owner is responsible for his/her tenant’s compliance with the governing documents, and can be fined or penalized for the tenant’s violations. Any owner who rents his/her unit should have a written rental agreement incorporating all of the governing document usage restrictions, and making the tenancy subject to any additional restrictions that are enacted by the association during the rental term.

 

 

Mortgages and Liens

 

 

What happens to the HOA and the other owners if an owner defaults on his/her mortgage?

 

When an owner defaults on his/her mortgage, the lender is entitled to undertake a foreclosure procedure that ultimately results in an auction-like sale of the defaulting owner’s unit. The lender has no recourse against the association or any other owner. The purchaser at the foreclosure sale must comply with all of the provisions of the governing documents, including the obligation to pay assessments. But a foreclosure sale purchaser is not responsible for any unpaid, pre-foreclosure assessments.

 

 

What is the purpose of the “mortgage protection” provisions of the governing documents?

 

Most lenders will refuse to make mortgage loans on homes within condominium projects and planned developments unless there are special provisions in the governing documents to protect them. These provisions are designed to insure that the basic rights and responsibilities associated with the home at the time the loan is made cannot be easily changed. The lender is particularly concerned about changes that might de-value the home such as an increase in the home’s assessment allocation, the removal of a parking or storage space, or an uninsured or underinsured loss. Most lenders review the mortgage protection provisions of the governing documents before they approve a mortgage within a condominium project or planned development.

 

 

What is a mechanics lien, and what happens if one is placed against a unit or lot?

 

The term “mechanics lien” describes a document that can be recorded with county government by an unpaid contractor or construction materials supplier. The recording of a mechanics lien relating to a particular property effectively prevents the owner from selling or refinancing the property without either paying the bill or establishing in court that the lien is invalid. When construction is performed for an individual owner on his/her condominium unit or planned development lot, the owner’s contractors and construction materials suppliers can record mechanics liens against that owner’s unit or lot, but cannot record mechanics liens against the common area or against any other owner’s unit or lot. When construction is performed for the association on the common area, the association’s contractors and construction materials suppliers can record mechanics liens against the common area and every unit or lot. An owner who learns that a mechanic’s lien has been recorded against his/her unit or lot should consult an attorney. For additional information, see Civil Code §1369.

 

 

Enforcement and Disputes

 

 

Disputes Between An Owner and the HOA

 

 

How should the board proceed if it learns of a violation of the governing documents?

 

The Condominium Bluebook provides step-by-step instructions for association enforcement of the governing documents.

 

 

What are the procedures when an owner is entitled to notice and a hearing?

 

It is important for each homeowners association to adopt a written notice and hearing procedure to be used in responding to alleged violations of the governing documents. The procedure should require:

 

That the board provide a written notice to the owner specifying the nature of the problem and whether the matter might result in the levy of a personal reimbursement assessment or the imposition some other sanction;

That the notice state a time, date and place at which the owner will have an opportunity to be heard by the board, and that the notice be given to the owner at least 15 days before the hearing date;

That at the time of the hearing, the owner who committed the alleged violation, and any other interested party, shall have an opportunity to speak for a reasonable period of time (the length of which can also be specified); and

That at the conclusion of the hearing, the board shall determine whether the violation has occurred, and whether to take action as permitted by the governing documents, and that the board’s decision shall be final.

 

What is “internal dispute resolution”, and when is it required?

 

Civil Code §1369.510 requires that owners who have a dispute with the Association be given the opportunity to meet and confer with a representative of the Association governing body to attempt to resolve the dispute. Civil Code §1369.510 imposes detailed requirements for this procedure, and also requires the Association to notify the owners of the availability of this process annually.

 

 

What are mediation and arbitration, and when are they required?

 

Mediation and arbitration are methods of alternative dispute resolution (“ADR”). Their purpose is to save time and money by resolving disputes without going to court. Mediation involves a neutral person who attempts to help the parties resolve their dispute through discussion and compromise. A mediator does not make rulings or decisions. Consequently, mediation is always informal and non-binding. Arbitration involves a neutral person who acts as a surrogate judge. An arbitrator considers the position of each side, and the applicable law, then makes a ruling. The parties decide in advance whether the ruling will be binding or non-binding.

 

Most governing documents require some form of ADR, but there is wide variation regarding the type of ADR required and the situations where the requirement applies. Regardless of what the governing documents say about ADR, there are certain circumstances when the law requires at least an attempt at ADR as a prerequisite to beginning any legal process. Sample requests and responses for alternative dispute resolution are provided in The Condominium Bluebook. For additional information, see Civil Code §1369.510 et. seq.

 

 

Who pays the attorneys fees in a dispute between an owner and the HOA?

 

The law provides that in any legal action brought by an owner, or by a homeowners association, to enforce the provisions of the governing documents, the prevailing party shall be entitled to recover his/her attorney’s fees and costs, provided they are reasonable. Some governing documents broaden the right to recover attorney’s fees and costs so that it applies in all disputes relating to the property, including those that do not involve enforcement of the governing documents. In all instances where a right to recover attorney’s fees exists, it will apply in arbitration as well as in court. For additional information, see Civil Code §1354(f).

 

 

Disputes Between Individual Owners

 

 

Is the HOA legally required to enforce the documents?

 

In general, homeowners associations have discretion whether or not to enforce the governing documents. This discretion is removed, and enforcement mandatory, in instances where the governing documents explicitly require association action. But regardless of whether enforcement is mandatory, it is usually advisable for the association in act in order to avoid future enforcement problems. Beehan v. Lido Isle Community Assn. (1977) 70 Cal.App.3d 858, 137 Cal Rptr. 528; Deane Gardenhome Assn. v. Denktas (1993) 13 Cal.App.4th 1394, 16 Cal.Rptr.2d 816.

 

 

How can an owner act independently to enforce the documents against another owner?

 

Each owner in a condominium project or planned development has the right to independently enforce the governing documents against any other owner. The mechanism for enforcement is either the court system or alternative dispute resolution depending on the nature of the violation and the dispute resolution provisions of the governing documents. Owners interested in pursuing an enforcement action should consult an attorney. For additional information, see Civil Code §1354(a) and Posey v. Leavitt (1991) 229 Cal.App.3d 1236, 280 Cal.Rptr. 568.

 

 

Are there alternative dispute resolution requirements applicable to owner disputes?

 

Alternative dispute resolution requirements imposed by law, and those imposed by the governing documents, are applicable to owner disputes. For a general discussion of alternative dispute resolution requirements, refer to the question “What are mediation and arbitration, and when are they mandatory?” above. Sample requests and responses for alternative dispute resolution are provided in The Condominium Bluebook. For additional information, see Civil Code §1354

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