A PENNY SAVED IS NOT ALWAYS A PENNY EARNED!
(PENNY PINCHING WOES)
by Beth A. Grimm, Esq.
hat Happens If A Community Association Fails To Adequately Fund Reserves, Continually Defers Maintenance, Or Fails To Pursue Existing Construction Defect Issues?
It is a ticking time bomb. Eventually ... #?!*BOOM*?#!
Ever heard a board member say something like:
- "And we're proud that we have not had to increase the assessments for more than ten years."
- "My interest in serving on the board is in keeping the assessments low."
- "We have postponed painting for a few more years, because the buildings look pretty good."
- "I want to limit the association's spending to maintenance only - any replacements or upgrades should require membership approval."
Experience says these words can spell disaster...
There are many, many associations that do not visit an attorney until there is a problem - a big one. And seeing the same problems over and over, one begins to wonder how it is that a board of directors can miss what is going on in their own backyards. It is understandable if an association has difficulty discovering a construction defect like a leaky roof - if there is a five-year drought. It is understandable the association representatives could miss poor construction or reconstruction if the work looks good cosmetically. It is reasonable to believe the board could miss any "latent" problem (one that is not easy to see or discover). But watching buildings, garages and carports coming apart at the seams is hard to miss. Complaints of leaky windows and peeling paint should not be overlooked. Defying and challenging expert opinions as to how long a roof or a paint job will last, or a solar or drainage system will be effective is not a fine art, it may be reckless. Stretching a dollar too far can lead to an undesirable and unanticipated nightmare, requiring a very large special assessment.
A special assessment can be devastating to the owner who never noticed the benefit of the $1, $2, or $5 a month savings reduction in assessments that came about through overly frugal "pinching. The point of this newsletter is to give you some serious things to think about the next time the board discussion turns to scrimping on maintenance, deferring discussions about possible construction defects, declining to hire a construction manager or architect, or choosing the cheapest contractor.
Here is a common scenario: Residents are beginning to complain about what seem like little things. The ceiling corner of the bedroom is starting to darken. Doors are getting hard to close. The paint seems to be peeling in some areas. The ducks are lining up to swim in the crawl spaces. Cracks in the dry wall run faster than they can be patched and repainted. A couple of residents have mentioned that their children's bicycles are rolling to the corner of the deck.
So now what??
If there are indications of problems with buildings, structures, drainage, or other improvements, or there are symptoms indicating potential construction or design defects, your board needs a plan of action. You need to protect and preserve legal "statutes of limitations"- preventing delays which might cut off reasonable claims.
Whenever a board receives a bunch of complaints (as opposed to one or two) which indicate a possibility of a problem with the structures or improvements, a certain amount of investigation is required. The board needs to decide what to do. The extent to which an investigation should be undertaken should be discussed with the association attorney. This phase could be referred to as a "due diligence" phase. It makes good sense to investigate "symptoms". The ostrich approach (bury head in sand) leaves the "derriere" dangerously exposed. Two very important preliminary questions that must be resolved at the outset are: Who owns the property? and Who is responsible for the property? The answers may not be the same. Either answer may implicate the Association.
There are some specifically defined laws that dictate responsibility. For example, the language of Civil Code Section 1365.7 requires (in my humble opinion) investigation of possible construction defects when there are "signs" and making a reasoned decision whether or not to file a lawsuit, if defects are discovered. The statute says that decision "is within the scope of the responsibilities of an Association Board" of Directors. To fulfill their fiduciary duty and to protect each and every Director from individual liability, the Board members must do something if the red flags go up about possible defects. The Board must act, in all cases,
- In good faith, with prudent judgment
- Within their capacity as Board Members
- And must carry at least $500,000 or more (100 or fewer units), or at least $1,000,000 or more (more than 100 units), in general liability and directors and officers' liability insurance protection.
Corporations Code Section 7231 requires a Director to perform his/her duties in good faith, in a manner such Director believes in the best interest of the Corporation, and with such care, including reasonably inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.
"Reasonable inquiry" means consulting the appropriate experts rather than making decisions based on board member "guestimates." Corporations Code Section 7231 entitles the Directors to "rely upon information, opinions, reports, or statements, ...[by counsel, independent accountants or other persons] as to matters which the Director believes to be within such person's professional expertise or competence...".
Remember the preliminary inquiry in any investigation of construction defect matters or deteriorating infrastructure? Who owns the propert? and - who has the responsibility to do something if indeed there are problems or defects? The questions for the board are:
"What should be done by the association?" ..."What can be done?"
If there is as determination that the Association either owns the property or has responsibility for it, the association should then investigate, determine the extent of the problem, and act. There may be a need to act first and then correctly assess responsibility. The answer might vary depending on whether the association is a condominium or a planned development. Even if the property is not owned by the Association, it generally has legal standing to bring an action on behalf of the members. This authority carries with it certain obligations.
Deteriorating Components/Deferred Maintenance Issues
Here is another common scenario: The association board of directors have called a meeting to discuss major rehabilitation that is necessary, because the buildings, garages or carports have deteriorated, somehow it seems - when no one was looking ... The parties present usually include, in addition to the Board
- A large [anxious] contingent of owners
- The contractor or consultant that has made a report as to the damage and may have bid the necessary repairs/maintenance and replacements.
- The association's attorney, who is primarily there to talk about legal responsibilities of the board, and the legal means of raising the money to do the massive rehab work.
- At least one banker, who is there to present loan options to individual members and to the association board.
These meetings are difficult. By the time it gets to this point, there are no pleasant options. Everyone up front takes some heat because there is a "big bucks" project looming in the horizon, and the people in the room are going to have to pay for it. The meeting can become a finger-pointing expedition - the owners often feel betrayed. In order to avoid this scenario, be sure the pay attention and:
Have Periodic Inspections By Qualified Persons.
Any association can gather information on contractors by opening up the yellow pages to contracting consultants and calling people, describing the problems. That is usually not the recommended course of action unless you know exactly what questions to ask. The better way to find an expert is by word of mouth, a recommendation from someone else in a similar situation, or perhaps by contacting your local Community Associations Institute (CAI) chapter in your area. Ask for the names of community association "wise" contractors, engineers, reserve study preparers and construction managers, bankers, and attorneys, depending on your needs. There is no cost involved in making some telephone calls and inquires, and seeking out information about the right kind of expertise and what is available in the market place. The more earnest the effort, the more valuable the "return."
Under California Law, namely Civil Code Sections 1365 and 1365.5, community associations are required to have a reserve study prepared every three years, which includes a visual inspection of the components. That is a minimum standard. Most associations would do much better if they arranged a cyclical or annual inspection plan, and an annual inspection.
Keep Good Maintenance Records.
In past years, many associations struggled with maintenance records. In this day and age, with increased awareness and practices being improved, there is more attention given to the importance of maintenance records. There are services available which provide a service of keeping up-to-date maintenance records. There are associations and knowledgeable reserve study preparers available also.
Obviously, roofs, buildings, pools, walkways, road surfaces, and other improvements tend to last longer if they are properly maintained. Again, association representatives can get a considerable amount of information by talking to knowledgeable contractors about the improvements and buildings on their property. Most reserve preparers also have construction experts on staff or available. Part of the reserve study required by California Law should include an analysis as to what kind of maintenance can be done to prolong the life of a component for which reserve funds must be collected. For example, timely painting of buildings protects the building itself. I have heard at many seminars: "If you wait until the paint starts to chip or fade, you've waited to long to paint." Apparently, the paint acts as a sealant which keeps moisture from forming under siding and causing dry rot. Even if a roof looks decent, an inspection may show that there is some problem underneath the surface, or that flashings are missing, or some other condition exists that will cause early deterioration of the roof. If the inspections are overlooked, important things may be missed.
Without preventive and ongoing maintenance, an association which for several years appears to be in good shape can quietly slip into deep trouble, such as that described above, requiring a substantial amount of time and money to fix.
For lots more information on where the money comes from (to look at various sources), what kinds of issues come up over funding, spending (and borrowing from reserves), special assessments, lender's requirements, what can go wrong with careful planning, the board's fiduciary duty, and what to do once you have the money, go to the Publications page and look for a three part series on Reserves.
For much more information on reserves, see the publications page.
By Beth A. Grimm, a community association attorney in California, East Bay Resource Panel Chairperson and author of various publications and books about condominium living and the law, and a frequent contributor to THE ECHO JOURNAL.
copyright 2001, Beth A Grimm, all rights reserved... any attempt to improperly use or republish these materials and/or this article without the author's permission is subject to legal action. If you would like printed copies provided through the mail from Ms. Grimm, click on the order form attached. There is a charge of $20 for each article for this service.
THE MATERIALS BEING MADE AVAILABLE HAVE BEEN WRITTEN OVER THE YEARS AND DO NOT COVER STATUTES OR CASE LAW OR PRACTICAL ISSUES THAT AROSE AFTER THEY WERE WRITTEN.
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.