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Small Association - The Big Picture ­Compliance - PT I

Are You Slowly Sinking In The Sea Of California Compliance Requirements?
Better Start Bailing!

  By Beth Grimm, Attorney

We bale hay and bail a boat. The government bails out failing banks and companies. People "bail" on relationships or bad marriages. Here, in context, when I say "better start bailing", I mean doing what it takes to stay afloat.

Mini Courts HOA consists of 10 homes, 4 houses to a court, 2 homes in between the courts on the residential street. Each owner owns their house and lot. The only maintenance responsibility the HOA has is to maintain the asphalt courts and sidewalks, and maintain the front lawns of the Lots. Pretty simple, right? What can go wrong?

Sorry to report, quite a few things can go wrong. California has a myriad of compliance requirements for homeowner associations and for the protection of owners in them. The Secretary of State and some local agencies have regulations and regular reporting requirements. There more than a hundred statutes on the books in California relating to HOAs. And there are regulatory documents that exist for each and every HOA. Yes, there are layers and layers of compliance requirements. And burying your head in the sand to avoid having to recognize them exposes your derriere!

Consider this example: in Mini Courts HOA (fictitious name), for several years, an owner stepped up and unilaterally assumed "management" of the Association. Perhaps no one else was willing to get involved. Maybe he didn't ask. He paid himself $200 a month and sent out the annual assessment notices, collected operating and reserve funds, reconciled the bank accounts, and paid the landscape company. He and his wife planted some flowers by the mailboxes. Fairly recently he received a life-altering diagnosis and could no longer do any of these things. He loaded two boxes of records onto a hand truck and rolled them over to the neighbors' porch. They had talked across the fence but never about passing on the HOA duties from one to another.

These neighbors were both professionals and fully capable of doing what it would take to learn how to manage a homeowners association. The problem was neither of them had the time to spend 100 hours or even 10 hours a week educating themselves and keeping up with the law that regulates homeowner associations. The wife was a lawyer and had selected exposure to the Davis Stirling Act regulating HOAs in California because one firm she had worked in years before did insurance defense, and some cases involved defending contractors in HOA construction defect claims. She had been exposed very peripherally to corporate law and the concept of directors making decisions in one job. She had an understanding of the concept of legal disclosures and liability from having worked for a real estate law firm. She understood "deep pocket" theories because she had defended some "small fish in a big pond" with peripheral involvement but who also had pockets lined with insurance policies (a recovery source for plaintiff lawyers).

She had just enough knowledge to start peppering her husband with questions and concerns about legal responsibility and liability. She -knew enough motivate her "pragmatic-left-brain-engineer" husband to get busy and move the effort forward to get the HOA rolling in the right direction. For the past couple years, they had both glibly assumed the neighbor must've known what he was doing since he had done it for so many years.  

Minimal HOA responsibility. Should be a cinch, right?  Not necessarily so.

In short order they found out that the boxes of records were far from organized. Then they found out that some of the owners had not paid assessments for a couple of years. Then they found out that the association, a corporation, was tagged as "inactive" in status on the Secretary of State website (www.ss.ca.gov/business search). There were no copies of filed statements with the Secretary of State or tax returns at all, no minutes, no indication of any meetings, elections, or annual disclosures to members. They had lived there a couple of years and couldn't remember getting any notices about financials, meetings or elections. The neighbor never mentioned any. He had in chatting with them across the driveway told them, when they said they were thinking of getting a screen door in the front, that there was an approval process. He was the "approval process" and helped them choose the "right" one. They paid their assessments each month from a coupon book the "manager" gave them each year, and understood the money was used to maintain the streets and front yards. Soon the "manager" neighbor went into hospice. His wife was clueless. So there was not even any source of "history" available.

The engineer husband (now acting President, according to the "manager neighbor" on his way out) was willing to give it a go, but as time went on, he began to realize that the compliance requirements for HOAs in California were over whelming and none had been satisfied since he and his wife had purchased their home, or for a long time before that. He tried to pull together accounting records that were a mess, vowed to confront the landscapers who had really slacked off when the neighbor got sick and didn't keep after them, and began to look at some of the compliance requirements noted in The Davis Stirling Act In Plain English (a publication of this author).  It became clear there was a lot to learn.

And then, to add insult to injury, another neighbor put their home up for sale, gave the engineer's address (mailing and email) and phone number to the realtor for the escrow demand, and a new owner moved into the neighborhood. The couple was kept busy getting copies of what they could find to answer the "demand" and soon found out the new neighbor was a complainer, about something new every day: garbage cans left out a day too long, a car parked in a driveway overnight, kids chalk marked hopscotch boxes on the court sidewalks, and a neighbor's Saturday garage sale to raise proceeds for his church. The person had no boundaries keeping him from appearing at the door after dark, and calling or emailing every day to note some "problem" and ask when something would be done about it.  Annoyed isn't quite descriptive enough for what the "new President" was beginning to feel.

With the help of his wife who had some specialized knowledge, and an outside resource that knew even more, and being the pragmatic soul he was, the President charted out a methodical course which included these things  (1) sort the documents, books and records, (2) prepare a notice to owners, (3) call an association meeting, (4) recruit board members, (5) gather information to fix the corporate status, (6) talk to the landscapers, and (7) look for a long term solution for managing the HOA.

The Path to "Recovery" Can Be a Bumpy One

Imagine that you live in a small development and you hear, see, or receive something that suggests you are part of a smaller "community" within the city or county in which you reside. If you failed to read the documents in the pile of things you signed in escrow (and who has the time or inclination?), or you purchased without going through escrow, you could easily be oblivious to that fact.  Notice might come in the form of a shared driveway, talking casually with a neighbor; receiving a letter from the City, County, or even the Secretary of State or Franchise Tax Board; receiving a notice from a neighbor demanding that you participate in replacing a failing fence or retaining wall, receiving an escrow demand for a home in the community, receiving an invoice for assessments. More than 60% of the 40,000+ homeowner associations in California have fewer than 25 units, and no one to guide them in the California compliance requirements. There are resources, one of which is the author of this Article. But one has to know to look, and what to look for, and why.

Why should anyone be concerned about locating and/or organizing documents and records?

Because the documents are the legal glue that holds the association together. They need to be available, to be read, and to at least minimal maintenance, which means occasional updating, and/or follow through with good rules and policies. Every association should have a common repository for copies of documents. Some documents are more important than others. Here is the recognized hierarchy.

Recorded, Regulatory Document: At the least, there should be a recorded "Declaration" of some sort, such as a "Declaration of Covenants, Conditions and Restrictions" or "Enabling Declaration" or "Restrictive Covenants". These are the restrictions on the property in the development, including land use regulations, maintenance assessments, architectural controls, insurance requirements, and obligations that relate specifically to the real property and an owner's use of it.  In California, it is usually the former and the name is often shortened to "CC&Rs."

If you can't locate any document that looks like a "Declaration", all is not lost. Take a look at your own deed, or go to the local county recorder's office and search the name of your development, assuming you know it, or your own name, to find your deed. A review of the deed description on your own personal deed, and if you received one, a title insurance report or warranty, should disclose the Declaration references you need to get the HOA documents from the recorder's office. If the title company did its job properly, and you live in a CID - which is defined as a common interest development ­ it should become apparent when you review the deed. Ownership in a CID in California equates to ownership in a community apartment project, a condominium project, a planned development or a stock cooperative. Definitions for these can be found in The Davis Stirling Common Interest Development Act located at Civil Code Section 1351-1378 in the California law books (online at www.ca.gov and this website, and on the shelf at your local library). After January 1, 2014, this Act will be moved to Civil Code Section 4000s-6000s.

Even if you own a free standing home on a lot, you could be part of a CID with architectural and/or landscaping restrictions, an entry gate, common mailboxes, assessments, and/or  powers of enforcing related restrictions, and there should be some recorded restrictions.

The "Charter" Document for the Association: A homeowners association is a group that is incorporated or unincorporated (usually incorporated in California), which is created for the purpose of managing a common interest development. Not all HOAs are incorporated, but most in California are. The Articles of Incorporation is the document filed with the state that incorporates an HOA. The board of directors is the elected, deliberative body responsible for managing, planning, setting policy and operation of an HOA. Members of unincorporated associations generally have more personal risk for a board's mistakes or in the event of an accident in the development than in an incorporated association. There are a number of benefits to incorporation. However, if your association is a corporation and the status is suspended, then action needs to be taken at the earliest opportunity to reinstate the California HOA to active status so the board can operate legally. That may include filing back tax returns (yes, even though you do not pay taxes as a nonprofit) and informational forms and giving copies of documents to the Secretary of State and/or Franchise Tax Board.

The Organizational Document for the HOA: Most common interest developments have homeowner associations (HOAs) to administer the regulatory requirements and manage the development. The document that sets up the organizational structure for the HOA whether incorporated or unincorporated is called the Bylaws. Sometimes the provisions that should be included in a set of Bylaws are actually stated in the Declaration/CC&Rs instead, and there are no Bylaws. Bylaws are important and if you cannot locate any for your association, as soon as a board is formed, it should look at getting a set drafted and approved, and the provisions in the CC&Rs amended out, with member approval if it is required. The Bylaws contain provisions related to notices, elections, records review, the number of directors, board candidate qualifications, dates, places and times of meetings, board authority and powers, required member disclosures, and the officers' appointment, designations and duties, and the fiscal year.

The Policies/Rules/Regulations: If you come across policies, rules and regulations, keep them with the official HOA documents. These are normally drafted and approved by the the board of directors, and reflect CC&Rs and official policy, many times adding important detail to the regulations. Sometimes owners are allowed to vote on adoption of rules and/or regulations.

Governing Documents: Under California law, the declaration of CC&Rs and other documents such as bylaws, articles of incorporation and rules which govern operation of the association are collectively called the governing documents and the Davis Stirling Act does in many sections use these terms, referring to "Declaration" specifically, and "governing documents" collectively, quite frequently.

Key Note: It is important to locate, gather up and read those documents, and do your very best to understand them or get help to do so, whether you are a board member or not, but especially if you are a board member! Honoring them is critical to the "health" of your development. If they are sorely outdated (which a good, honest, and knowledgeable HOA attorney can tell you), it is necessary to put on your list of things to do to explore options for getting the documents updated. Most amendments and restatements require membership approval.

Next on the list after locating, categorizing and sorting the documents, books and records, and finding a place for them, the acting "President" in Mini Courts HOA prepared a notice to owners.

He included the following items: news about the former manager, documents that existed in the files, outstanding assessments (not by name reference but fact that accounts needed to be brought current), scheduling of a meeting to share reports on financial books and records and status, plea for board candidates, note about intent to hold election, note about corporate status and intent to research correcting the problem, note about the landscapers and intent to address any complaints ­ and invitation to send them in -, and note about need for cooperation, volunteerism, and long range plan.

In Small Association - The Big Picture, PART II, you will find more on how this small association is pulling itself up by the bootstraps, and what issues come into play in doing so.