RECENT DEVELOPMENTS IN HOMEOWNER ASSOCIATION LAW
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RECENT DEVELOPMENTS IN HOMEOWNER ASSOCIATION LAW A shift in the balance of power By Barry Ross - June 05, 2006 Irvine, California There are 36,000 common interest developments in, California comprising more than 3 million housing units occupied by approximately 7 million people. This is roughly one-quarter of the state's housing. With most of the new housing developments being common interest developments and the anticipated influx in population, these numbers are likely to increase in the years ahead. The Legislature has recognized an obligation to address some of the perceived abuses of common interest developments because of die large number of people residing in them. During the 2005 session, the Legislature enacted several, new laws designed to address the perceived abuses; including limitations on assessment collections, limitations on the conveyance of the exclusive use of common area, procedural safeguards for elections,changes in the architectural decisions and increased access to homeowner association records. LIMITATIONS ON ASSESSMENT COLLECTIONS Incidents were reported where homeowners associations were foreclosing on homes of low income senior citizens m order to collect thE unpaid association dues of a relatively small amount (i.e., less than. $1,000), resulting in the loss of family homes, as well as the loss of substantial equity m their homes, in some instances, more than $100,000. When, an incident was investigated, the Board of Directors said it was not informed of this action by its staff and the property owners said they were not aware of what was happening! Senate Bill 137 became effective on January 1,2006 (see Code of Civil Procedure §§ '116.540 and 729.035). This legislation provides special protection to the property owner where the delinquent assessments arc less than. $1,800. In such a. case, the homeowners association may file a civil action in Small Claims Court. The homeowners association is not permitted to record a lien or initiate foreclosure until the unpaid assessment exceeds $1,800 or the assessments are more than. 12 months delinquent. In connection with any dispute relating to assessment collections, the homeowners association must offer the property owner both. internal dispute resolution and alternative dispute resolution before proceeding with foreclosure. In the even (hat the Board of Directors wishes to proceed with foreclosure, the Board of Director must approve the decision by a majority vote and must provide written notice of this decision to the property owner. In addition, the homeowners association must provide the property owner with an Itemized statement of the charges owed by the property owner, Finally, the property owner has a, 90 day right of redemption to recover the property after the foreclosure sale. This statute will severely limit' the use of foreclosure to recover unpaid dues owed to the homeowners association by the property owner. LIMITATIONS ON THE CONVEYANCE OF THE EXCLUSIVE USE OF COMMON AREA Incidents were reported where the Board of Directors of a homeowners association was granting certain favored members the exclusive use of certain common areas, but denying this privilege to disfavored members. It was also reported that the Board of Directors was giving certain members the exclusive use of common areas, while the balance of fie membership was losing a valuable community asset An example is a greenbelt area adjacent to two homes with limited access or utility to anyone other than the persons who own the two homes. The homeowners association conveyed the greenbelt area to the adjacent property owners for their exclusive use, This conveyance deprived the general membership of the homeowners association access to this greenbelt area, which, according to the governing documents, are intended to be for the benefit of all members, not just the two adjacent members. Civil Code § 1363.07 became effective January 1,2006. This statute prohibits a homeowners association from granting the exclusive use of any portion of the common area to any member unless the grant is approved by a super majority vote of 67%; however, the governing documents may specify a different percentage. In addition, the statute contains a variety of exceptions to the rule which would allow for a conveyance of exclusive use of common area by the Board of Directors, without the requirement for a super-majority vote of the members. These exceptions are: to eliminate or correct engineering errors; to eliminate or correct encroachments due to errors m construction of any improvements; to permit changes in the plan of the development submitted to the Commissioner of the Department of Real Estate; to fulfill the requirements of a public agency; to transfer the burden of management and maintenance of any common area thai: is generally inaccessible and is not of general use to the membership at large; any grant in connection with an expressly zoned industrial or commercial development. This statute will severely limit the circumstances under which a property owner can be granted an exclusive use to any portion of the common area, . PROCEDURAL SAFEGUARDS FOR ELECTIONS Incidents were reported where homeowner associations were rigging elections so that the current Board Of Directors could no!; be replaced by the challengers, even though the challengers might have more support from the member's. The reported abuses Included ballot stuffing, disallowing legitimate proxies and denying, the challengers access to homeowner association membership lists, facilities and media, In addition, more subtle abuses concerned the adoption of voting procedures that made it more difficult for a challenger to unseat an incumbent, such as changing the rules during the election process. SB 6l will become effective on July 1, 2006. Civil Code § 1363.03 specifies procedural safeguards for elections at homeowners associations. The statute states that all candidates and members advocating a point of view must have equal access to homeowner association media, such as newspapers, websites, and the Internet, as well as equal access to the common area meeting space. The homeowner association is required to specify, in advance and in writing, the qualifications for candidacy and the procedures for nomination of candidates. The homeowners association is required to specify the qualifications for voting, the voting rules, the rules regarding proxies and the voting time periods for the election. In addition, the homeowners association must select independent third parties, 1 or 3, as inspectors of elections. There are detailed rules on who may be an inspector of elections, as well as the specific duties of the inspector of elections. An inspector may not be a member of the Board of Directors, a candidate for the Board, or a person related to a member of the Board of Directors, or a candidate of the Board of Directors. Persons who are under contract with the homeowners association may not be inspectors of an election unless this is expressly permitted by the governing documents. The balloting must be secret. Finally, detailed procedures are specified to assure that no one knows the results until they are announced at the annual election meeting. Civil Code § 1363-04 prohibits the use of homeowners association funds for campaign purposes. This may prohibit the homeowners association from paying for food at a candidate's forum, even though all the candidates are invited to participate m the forum. Civil Code § 1363,09 specifies the remedies available to members when the homeowners association violates the election procedures, The member may bring a civil action within one year of the violation, The Court may void the results of the election. The court may also award the member reasonable attorneys fees for the action, plus civil penalties of $500 per violation. If the homeowners association prevail in such an action, the homeowners association recovers its attorneys fees and costs only if the court finds that the member's action was frivolous, unreasonable and without foundation. There has always been grumbling about the results of elections to the Board of Directors. With the favorable attorneys fees provision, the grumbling is likely to be replaced with litigation. CHANGE IN ARCHITECTURAL DECISIONS The architectural decisions of a homeowners association, are generally based on aesthetic considerations, such as whether the improvement is in harmony with the rest of the community. These decisions arc generally not based on building codes or health and safety considerations which are generally determined by the appropriate city or county that has jurisdiction over these issues. Incidents were reported where homeowners associations were making architectural decision?which conflict with the requirement of die building code, health and safety requirement, or other rules of the city or county Property owners were in. a quandary when the homeowners association approved an improvement that the city or county said was illegal, Sometimes, the Architectural Committee or the Board of Directors would approve an improvement that was contrary to the governing document of the homeowners association. SB 853 became effective on January 1. 2006. Civil Code § 1378 provides that a homeowners association may not make any decision that, conflicts with any public law. This would include building codes, land use requirements, and health and safety regulations. This statute also provides that the homeowners association may not authorize any physical change in the common area that, is inconsistent with the governing documents unless the change is required by law. This means mat if the governing documents specify that there is a swimming pool in the common area, the Board of Directors cannot change the swimming pool to a tennis court because that would be inconsistent with the governing documents. In response- to this statute, a homeowners association may have to retain an archltect/civil engineer in order to make sure 'that its decisions comply with the codes of the city or county. INCREASED ACCESS TO ASSOCIATION RECORDS II was reported that homeowners associations were not providing their members with records of the homeowners association, Since the homeowners association is largely financed by dues paid by members, it appeared to be abusive for the homeowners association to decline to provide its members with its financial records so that the members could determine how well or how poorly the homeowners association was being operated, Aside from refusing to provide the records, there have been instances where the homeowners association has charged exorbitant fees for the records, or unduly procrastinated in producing the records. Civil Code § 1365.2 will become effective on July 1, 2006, This statute expands the list of documents of the homeowners association that members are entitled to receive and describes the procedures for the homeowners association to provide these records to members, within a reasonable time and at a reasonable cost. The available documents include financial records such as balance sheets, income and expense statements, budget comparisons, general ledgers, executed contracts, approved vendor or contractor proposals or invoices, state and federal tax returns, reserve account balances and records of payments made to or from reserve accounts. Also included are agendas and minutes of meetings of the members of the Board of Directors and committees, the membership list, and check registers, There are a series of exceptions to disclosure. These exceptions include documents that might lead to identity theft, fraud, documents that are privileged such. as attorney client communications, documents that might invade the privacy of persons, documents relating to disciplinary actions against members, personnel records, and interior architectural plans. As to membership lists, mere are some restrictions on access. The membership list roust be reasonably related to the requester's interest as a member, .(whatever that means), If the homeowners association believes that a member's request for access to the membership list is for some other purpose (whatever that means), the homeowners association may deny the request for the membership list. Further, a member may |choose to delete his or tier name from the membership list. The statute provides limited time periods for the homeowners association to provide the requested records such as ten business days for records prepared during the current, fiscal year and 30 days for records prepared during the two preceding years. The statute also provides for the limitation on the fees. that the homeowners association may charge,for production of records. The fees may not exceed $10 per hour for retrieving the records. Nor may the fees exceed $200 per request. If a member brings an action for non-disclosure of records and is the prevailing party, the member recovers attorneys fees, However, if the homeowners association is the prevailing party, the homeowners association recovers its attorney's fees only if the member's action is considered by the court to be frivolous, unreasonable or without foundation, There has always been grumbling by property owners that the homeowners association is refusing to provide its complete financial records to its members so that the property owners can assess the performance of the decisions of the Board of Directors of the homeowners association. With the favorable attorney's fee provision the grumbling is likely to be replaced by litigation, CONCLUSION The changes enacted by the Legislature in 2005 will shift die balance of power in homeowners associations away from the Board of Directors and in favor of the property owners, This will require an adjustment by both the Board of Directors and the property owners, Some of the statutory modifications are unclear and will require clarification by either the Legislature or court decisions. However, the direction of the Legislature is unmistakable. The Legislature is moving toward providing more power to the property owners and less power to the Board of Directors. This change is expected to continue in 2006.