BETH GRIMM'S TOP TEN WAYS TO
STAY OUT OF LEGAL (and other) TROUBLE - Part II
By Beth A. Grimm, Attorney, California, PR Chair, CLAC
ip #5: DON'T PINCH PENNIES
It may feel good to a board to be able to notify the membership that the board has taken measures to reduce the dues or the assessments. I was in a meeting recently there was a huge uproar because the association had eliminated security and closed the pool. While the board had apparently made a hit by reducing the assessments $30 a month, the "joy" didn't last long. After a couple of weeks of 100 degree temperatures, the community was very, very critical about the pool closure and elimination of security "drive-throughs". While the board of directors had some very good reasons for closing the pool, and did not believe it could get effective security measures for $30 a month from each owner, reducing the assessments inhibited the ability to creatively seek interim measures that would provide the community with some very important services. I have seen so many situations where the board "saved the owners money" through deferred maintenance, only to end up exposing them to multi-thousand dollar assessments ($5,000 to $60,000). For example, stretching a paint job out an extra two to five years because it "looks okay" often leads to disastrous problems. Using a handyman to make bandaid repairs when someone steps in a "hole" created by dry rot is another example of a situation that escalated into a "$5,000 + per unit" assessment. While some people think the way paint "looks" is what counts, others who have sat in the hot seat know that what paint "does" is much more important. The same goes for any other situation where the wrong criteria is used to roll back or freeze assessments. Penny pinching can lead to robbing Peter to pay Paul ..... and then getting caught!
Tip #6: CONSULT THE RIGHT KIND OF EXPERTS
Invoke the Protections of CC1367.5 and Corp. Code 7231 & 7231.5
Board members can get some insulation from liability for consulting the right kinds of experts, and relying upon their advice. The codes recited above provide this insulation, so long as the association carries a reasonable amount of insurance as specified by the code (and so "in good faith" includes, as defined in the Corporations Code, consulting the right kinds of experts and relying on their advice. An association should consult a knowledgeable CID lawyer to get legal advice, not a manager. An association should consult an engineer to overcome a design problem, and not a handyman. An association should consult a CID insurance expert, and not someone who is new in the business and wants to get together a "portfolio."
Use Architects, Engineers and Construction Managers For Important Construction Projects
Many boards of directors find they can save money in pulling together an important contract that involves various contractors and subcontractors without using a construction manager. However, board members do not realize the amount of coordination that goes into an effort that involves replacement of siding and roofs (just one example) at the same time.
The average board member would not even know which had to come first, or where these two items tie in, or whether they need to be done at exactly the same time. Experience and special skills are critical.
Common interest development buildings often contain complicated integrated systems that might require specially designed fixes.
Most contractors that are not used to working in CIDs and most Board members would not tend to foresee the potential problems that arise with regard to owner notification, coordinating right of entry, handling of pet issues, etc., etc., etc., whereby a construction manager who works in this industry would have that specific knowledge.
Board members might not have a full understanding or comprehension of the amount of money that can be lost (or saved!) with regard to handling those aforementioned issues, and most importantly, proper coordination of the project. Losses to contractors means lost time, and often there are financial ramifications to that. Having any contractor come and do the work out of order might require reconstructing, to get things done right. If the board chooses a roofing contractor and the roofs are leaking in such a way as to indicate the existence of a design defect, the association might not get the benefit of having corrective measures such that the same problem does not recur, and the same $5,000 to $25,000 assessment does not become necessary a second time within a ten year period.
Tip #7: DON'T THINK BEHIND CLOSED DOORS IS THE ONLY WAY TO RESOLVE PROBLEMS THAT ARISE
Having a Homeowner Forum and Then Closing the Doors To Do Business Is Not a Proper Way To Do Business!
Some boards (I find this tends to be the case more in self-managed than professionally managed) think that the new laws allowing the homeowners to address the board at meetings allow for the a process whereby the homeowners come in and address the board, and then the board sends everyone home and does business. While this might be nice and simple, and would probably minimize interruptions, it is not the status of the law.
Matters that are subject to executive session (meetings without the homeowners presence) are those matters that deal with personnel issues, negotiation of contracts, disciplinary matters, pending or threatened litigation, or attorney/client privileged matters.
One board recently discussed the issue of pool closure in closed session, because it was delicate and touchy issue, and I guess they did not want the input of the members on it. However, the result was that the board of directors understood all of the problems with keeping the pool open, and probably made a reasonable decision, but that decision blindsided the members and did not serve the community well. Certainly, if the board is discussing disciplinary matters relating to someone's conduct in the pool, that is subject to a confidential proceeding, but just discussing whether or not the pool should be closed - that is a matter for open session.
Don't Be Afraid To Discuss Delicate Issues and Seek Input From The Community
Seeking input from the community is not a bad thing. It helps give the board more information upon which to act, or at least to consider, especially if the board is looking at some kind of drastic action.
"Delicate issues" are not one of the prescribed special items that are subject to executive session discussions. In keeping the owners in the loop, there may be some difficult questions to answer or emotions to deal with, but at least the serious and often disastrous problem of the backlash of complete surprise is avoided.
Disclosure of Important and Serious Matters Can Be Beneficial
There is no question; there is a fine line between when the board of directors should actually disclose a potentially big issue that might result in a special assessment. Opening up the discussions to the members takes guts. When talking about a potential major rehabilitation project that could involve the possible depletion of the reserves or imposition of a large assessment, it sometimes becomes a matter of damage control and politics, rather than just good sense. The board often has a difficult task of trying to determine exactly what the problems are, and trying to estimate what the ultimate costs might be, without the benefit of firm bids. The investigation stage can last a long time. There is the question: at what point the owners should be given bad news information. The board does not want to create a panic, with everyone assuming there is going to be a huge assessment, if it is a matter that can resolved fairly swiftly and without spending a fortune. On the other hand, the board of directors does not want to disclose that it is considering problems that may cost in the neighborhood of $5-$10,000 (each unit) when in reality the problems could lead to a $30-$50,000 (each unit) assessment. Too much misinformation, just like a lack of any information, can lead to problems with regard to sales in the development. If a seller tries to be honest and disclose certain information with regard to a sale, and that information changes drastically (for the worse), that leaves the buyer with a bad taste in their mouth, and good reason to visit an attorney.
On the other hand, if the board of directors starts the discussions in open meetings about the problems that have been discovered, and goes through its methodical process of dealing with it, there will be entries in the minutes indicating that the board is looking at the issues. Those kinds of things present an important disclosure, even if they are not supported with an abundance of information (making sure of course to label the discussions "preliminary"). The board of directors can discuss bidding on contracts in executive session, and this is something that takes place as the board is developing its plan and moving forward if the problem can be fixed by contractors or service providers. Owners don't need to be notified about all the discussions with the architect, roofer, or other contractor, but a notation in the minutes that the board held an executive session to consider or review contracts for the architectural services of a roofing contractor would be a good indicator of where the board is in the process, and might forestall demands to know more about what the real costs are going to be. If the board of directors does not make sufficient disclosures to enable an owner-seller to give sufficient information to the buyer, then when the buyer sues the seller because they didn't know about the big special assessment, you can be pretty sure the seller might be looking for an outlet for that liability, and the association disclosures (or lack thereof) could be the first place to look.
Tip #8: REMEMBER - YOU ARE RUNNING A BUSINESS
Once again, do not take the job lightly. Get the right kind of help with business expertise. Do not forego or make important decisions because of emotion are bias. You are not running your neighborhood store. The board of directors is making decisions with regard to the spending of hard-earned money provided by each and every homeowner, of protecting important infrastructure, and of investing thousands of dollars. That homeowner has the expectation that the money will be well spent, and that the Board will take reasonable steps to protect their property values and create a decent community to live in. The association board can't be filled with "slackers or immature bodies" who don't fully understand what it takes to run a business. If the board is not seated with business people who understand and comprehend the need to make good fiscal decisions then those people must seek help from the right kind of professionals or experts. Professional management becomes very important in this scenario, even if there needs to be an assessment to pay for it (of course, understanding that the members may be required or entitled to vote on the issue).
Tip #9: REMEMBER - YOU ARE RUNNING A COMMUNITY
The dichotomy of homeowner associations is that the board of directors is not just running a business, but is also running a community. For years, I heard attorney trainers at legal programs for common interest developments tell attorney trainees, managers, and boards of directors to run the association like a business, without regard to what the people in the association think about anything. I heard the analogy to "GM Corporation" so many times I couldn't count them. Homeowner associations are not GM Corporation, and when board members turn their back on any of the members, they provide a moving target, with little insulation.
Boards of directors must listen to the community. Even though they are elected officials, when the community gets in an uproar about any particular situation, damage control may be the name of the game. Decisions must be based on what is good for the community, not for each one of the board members. Making the job of a board director easier by keeping meetings and decisions a secret is certainly inviting, but it is not the one and only most important consideration. Engendering community spirit could help with recruiting people to serve on the board and committees and could also help minimize grievances. Seeking input, surveying, and giving the community the opportunity to respond before the issues reach gigantic proportions is often a good idea.
Tip #10: REMEMBER - YOU ARE ELECTED OFFICIAL, AND ARE SUBJECT TO RECALL
Many people have the misconception that a board of directors can terminate a Director (kick them off the Board, not the other) if they don't like what that board member is doing. That's not the case. There are exceptions, of course. If a Director commits a felony, he or she can be removed from the Board. If the Board receives a court order of incompetency, the same applies. If the Bylaws of an association provide power for the board to "vacate" a board members position if they miss more than three meetings, then that board could by majority vote vacate the position for failing to be at three meetings. However, "removal" in that particular situation is different than removal by the body that elects the official, which would be recall. If the board vacates any director's position because they failed to come to meetings, or failed to meet other qualifications that are specified for board members in the Bylaws, then the board can appoint director(s) to fill the remaining term of that position. If the association members vote to recall a board member, then that position must be filled by election of the members.
Many people don't know that owners in a common interest development can petition the board for a recall meeting with only 5% of the members entitled to vote signing the particular petition requesting the recall. However, California Corporations Code so provides. If the board receives a petition signed by 5% of the voting members (not husbands, wives, tenants, etc.), it needs to react, because the law requires that a meeting be called. It seems to say that if the Board fails to do so within prescribed timelines, owners can call their own recall meeting. I've seen it happen and it creates mass confusion and legal battles. So I always suggest that the Board call a structured and meaningful membership meeting to vote on the recall and that it propose a straightforward agenda so that both (or all) sides have a reasonable opportunity to present. I often think that this is a golden opportunity for an incumbent board to respectfully tout its successes - because I can guarantee based on actual experience that the recall meeting will get the biggest turnout of the century for that Association.
I hope these Ten Tips help. They are not quite like a "how to" list; they involve some thought. However, the thought can be worth it if it helps the Association and Board cope with the next big issue and avoid complicated legal, coupled with political, emotional, and horrendously painful processes.
This article is written by Beth A. Grimm, Attorney, Mediator, Speaker, Author, Expert Witness, and Teacher in the Common Interest Development Industry. She is a member of and past Public Relations Chair of the CAI-CLAC (Community Associations Institute -California Legislative Action Committee), a member of and past Chair of the ECHO (Executive Council of Homeowners) East Bay Resource Panel, and author of "Finding the Key to Your Castle", and "The Davis Stirling Act in Plain English" two primers on CID living and responsibilities. To find out more about her books and articles, and most importantly about her recent class offering called "The Davis Stirling Act in Plain English", visit http://www.californiacondoguru.com.
copyright 2003, Beth Grimm
By Beth A. Grimm, Attorney. A "service oriented" attorney and member of ECHO and CAI and various other industry organizations in California and nationally, host of the website www.californiacondoguru.com; two Blogs: California Condominium & HOA Law Blog, and Condolawguru.com Blog, and author of many helpful community association publications which can be found in the webstore on her site.