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Small Association - The Big Picture - Compliance - Part II

Are You Slowly Sinking In The Sea Of California Compliance Requirements? After Bailing, It is Time To Get Your Coxswain and Crew in Place and Row - Pragmatically and Persistently

  By Beth Grimm, Attorney


I n PART I, you learned about Mini Courts HOA and the many problems that arose when the long time self-appointed manager got ill and handed over files without much instruction. The person who inherited the files had to bail quickly to stop the progression of problems. Now he becomes the coxswain, the person who steers the boat, provides motivation and encouragement to the crew, keeps the crew informed as to status and what is needed to reach the ultimate goal (which here is getting the association back in good standing and moving forward in the right direction). This person became the "coach", and even if he had received "instructions" from the prior acting manager/director, he would have had to bring in a new crew and change direction to get the association back on course. Besides the regulations for running the HOA itself, there are several disclosure requirements in selling and refinancing an HOA or Condo unit. These are in addition to the real estate "material disclosure" laws that already exist requiring answers to questions when listing or refinancing a property. The President of Mini Courts HOA found out about seller disclosure very shortly after inheriting the files, when an escrow "demand" found its way to him. A seller is entitled to ask the HOA to provide records directly to the escrow officer or agent of the buyer on behalf of the seller. And the HOA is required by law to do this, within ten days, or risk monetary penalties for failure to do so and legal liability for providing incomplete or inaccurate information. The HOA can charge its costs to the owner, but has to do the work itself.

The Mini Courts HOA President and his wife had to learn a lot about basic operations very quickly just to keep the association afloat. For anyone reading this who thinks it might be better just to let the association sink (assuming the State will come in and take over), the bottom line is that an HOA without someone in charge is just like a ship without a captain. There are so many things that can go wrong. And each and every homeowner carries some individual accountability for all those mistakes.  If an individual owner is unwilling to help row, he or she might be called upon to pay.

Board Members/Directors: Board members and directors generally are interchangeable terms. These are the elected officials of the association, like in a "mini government". HOA regulating documents generally have a process for meetings and elections of a board (consisting of Directors). Board members are generally volunteers, meaning they do not get paid for carrying out board business. Most sets of bylaws allow for reimbursement of expenses, but no pay. Boards can usually hire management but of course there must be enough money to pay for any contract signed so sometimes increased assessments are needed to get professional help. Some boards simply divvy up the tasks and adopt a "dues waivers" (although the proper term is "assessment waiver"), or a payscale or prorated waivers based on tasks assigned. In the case of Mini Courts HOA one person served as a director and manager, with no clear separation of duties or powers. The trouble with the idea of accepting "pay" for running an HOA is that lay people and even attorneys that do not specialize in this arena often fail to fully understand the ramifications. The amount of "pay" is rarely commensurate with the legal risks. It is important to recognize that accepting pay as a director can diminish or eliminate legal protections otherwise afforded volunteers. California law offers some immunity from lawsuits and judgments for volunteer directors if certain minimum insurance coverage is obtained by the HOA. If a director is receiving pay and is not protected by a contract that requires insurance or indemnification (protection against lawsuits), the director can be sued directly for the acts of another, or omissions, such as those of the prior "managing" owner. This could have happened to the Mini Courts HOA "director/manager". The point here is not to say a director can never get paid for services offered. However, it is important to note that an individual trying to do a service for little pay can end up to be a big target without protection.

The governing documents won't support payment to directors unless amended properly by membership approval. Any board that feels directors should be compensated and the legal liability risks are worth it should have a proper amendment to the CC&Rs drafted which would allow for an assessment waiver or compensation and then put it to a vote of the members. The amendment requirement should be stated in the Bylaws or CC&Rs, whichever document is being amended. If the members approve it, everyone has equal opportunity to run for the board and so it should be perceived as fair by the courts, if anyone challenges it. The reason it would probably require an amendment to existing regulatory documents is at least two-fold. First, in order to get California Bureau of Real Estate (BRE) approval, which is required for most associations in the state, the bylaws must prohibit compensation. The "model" calls for volunteers. And if payment of assessments is required, the CC&Rs will contain an "assessment obligation" that requires owners to pay a sum toward the costs of operation and maintenance. That sum may be on an equal or square footage or other basis, and it is enforceable. So if a board member gets a "dues waiver" and does not pay assessments or only pays a portion of what is required, another owner could complain that they are not paying their required share. Without a properly member-approved amendment, there is no exception to that legal responsibility for paying the assessment obligation.

There are lots of other things HOAs need to know about that would take several more articles to describe in detail:

Meetings: HOA and condo documents and California law require HOA meetings. Meetings are divided into two categories, membership and board meetings. Board meetings are further defined into several categories: open, executive session, emergency and teleconference meetings. In a nutshell, membership meetings are open to all owners. If a board wants to allow non-owners such as partners or spouses, significant others, tenants, etc., it can set policy specifying who else can attend.

  • Membership meetings (regular or special) are for the purpose of discussion and/or reporting on membership matters. This commonly includes things like reporting on annual financials, review and approval of membership meeting minutes, membership forums, and celebration. The main purpose of the annual meeting usually includes director elections (see more below on elections). Sometimes motions are raised at membership meetings to allow those present to vote. And while voting at annual membership meetings has been phased out in many HOAs because of mail ballot elections laws, counting ballots at annual membership meetings is a common occurrence. Some HOAs use this opportunity to have socials or parties to encourage socialization among members, and to seek out new members willing to serve on the board or committees. Notice of annual meetings has to be provided to members in writing within some reasonable time period before the meeting. Look for the required timeline in the bylaws.
  • Regular Board meetings are for board business and allow member attendance but not participation in the business. In order to get business done, boards have to stay on course, and the course be disrupted if members who attend interrupt the business to inject their thoughts and opinions.  It is usually best if the board adopts a policy that allows members to address the board at a specific time before or after the meeting, often called the "homeowner forum", rather than at times when the directors are discussing or voting on business-related action items or approving budgets or financials. California law allows members the opportunity to address the directors at board meetings, but it also allows the board to set reasonable controls like time (time of forum, time limits on speaking, and the like).  Notice and an agenda have to be provided to members (various options are available) at least 4 days before the board meetings.
  • Special Board meetings are those usually called by the President or two board members (look at the HOA bylaws for parameters). The purpose of special board meetings is to address matters that need attention between regular board meetings and typically involves a topic that might take more time than may be allotted at a regular board meeting. Owner notice requirements of a special board meeting and agenda are the same 4 day requirement as a regular board meeting but with one difference ­ the purpose of the meeting must be included on the notice.
  • Executive (closed) meetings are limited to certain topics that need more confidentiality to protect the interests of the association. Executive session topics include formation of contracts (bidding and negotiation), personnel matters, litigation matters, and disciplinary action. Notice of executive session meetings needs to be given to owners but they cannot attend. Notice has to be posted or provided to owners at least 2 days before the meeting, so owners at least know when the board is meeting in executive session.
  • Emergency board meetings are those that require faster decisions on matters for which there is no time to wait and call a special board meeting.  There are no notice requirements for owners with regard to emergency meetings. And these are the only type of board meetings that may be conducted via email, in addition to other face-to-face and telephone conference call options. However, for an action to be valid which is decided at an email meeting, the directors have to come to unanimous approval. The emails reflect the meeting record.
  • Telephone conference call board meetings are legal and may be held, but there are some special requirements. When necessary, board meetings can be held telephonically or a director can be allowed to "dial in". Sometimes this is necessary to meet the quorum requirements for a board meeting. The notice requirements are the same as for regular and special board meetings. However, arrangements do need to be made for one board member to be present, or a person designated by the board, in a location as near as possible to the association so that owners can be allowed to hear the directors and address the board in homeowner forum. The following items in a nutshell represent other things a board has to know to do its job properly:

    Every year several financial disclosures have to be provided to owners. These include next year's budget, assessment notice, a reserve study and funding plan to deal with maintenance and repair planning for buildings, HOA capital facilities, or roads that have to be maintained and HOA insurance policies.              

  • Every year several policy disclosures have to be provided to owners. These include information on sending notices to the association, dispute resolution processes, architectural control processes, fines and enforcement, collections including lien and foreclosure, and others.
  • Upon every escrow demand the board has to provide certain documents and disclosures to the escrow officer. The disclosures include financial and policy documents provided to owners annually, reporting on the status of construction defects lawsuit proceeds if any, information on discriminatory clauses and/or lease limitation restrictions in the governing documents and the entire packet of governing documents. The board also has to provide cost estimates for providing these documents. It can charge, but only actual costs. This is not a profit-making endeavor and the director in charge is not generally compensated for doing the work, unless a manager is under contract to do it on behalf of the association and the manager presents a bill or has a contractual arrangement. These documents must be provided within 10 days of the request and penalties, damages and attorneys' fees can be awarded to buyers for failure to cooperate.
  • Most HOA elections require a secret ballot package sent out at least 30 days prior to an election that includes envelopes to return to an inspector of elections. Because the 2006 California law was modeled on public elections, there are a number of difficult aspects for HOAs that have historically dealt with proxy voting. The HOA has to have rules that explain many aspects of the elections and inspectors, and that provide for equal access by candidates and those with opposing views if the HOA directors are treated to use of HOA resources for their candidacy or views.
  • Owners have rights to view extensive financial records. The law is generous in what owners can see related to financial records. The request has to be presented in writing by the owner and the HOA can charge for copies and costs of production, to a reasonable degree.
  • HOA liability insurance for accidents and directors' acts is imperative! Check for insurance policies. The members and the directors have the right to be protected with liability insurance coverage and most HOA documents require it.
  • Most HOAs could benefit greatly from professional management (assuming the person is trained in HOA management as opposed to general property management only). Unless a small group of owners wants a second taxing job they don't get paid for while carrying responsibility and liability and having to give an inordinate amount of time to the HOA, an HOA can benefit from professional management. The Mini Courts HOA has hired management. The membership was polled, allowed to vote, approved an assessment increase although not drastic, and the President is no longer alone in service ­ all because he worked hard to organize records, learn basic requirements, present options, and gather support for a proper structure in the association, and he and the board were able to convince owners that professional management was a good option. If a board is not headed in this direction, then it is imperative that the directors seek to learn California compliance requirements. It is critical to the health of the association and their own pockets. Legislators add new laws every single year that impose more obligations on HOAs because owners complain, long and loud about the shortcomings in their HOA. The courts are plagued with HOA related lawsuits based on director errors and omissions and the costs of liability and other insurance coverage continues to escalate. And deferred maintenance is a rampant issue in California HOAs. Nothing gets the attention it needs when there is no active responsible board in place. And when things fall apart, the finger pointing begins. HOA lawyers are busy sorting out the differences that arise and negligence that commonly occurs when no one steps up, or those that do fail to fully understand their responsibilities.
  • Resources.  Directors, managers, vendors and homeowners in HOAs are hungry for information, although many would prefer to remain "armchair quarterbacks". ECHO offers seminars and an abundance of resources and contacts and is a very good place to start looking for information. If the President of Mini Courts HOA had no resources, or was not willing to go out and seek any, the association members would ultimately feel the pinch, maybe in little ways, or maybe in a very big way. He had to look for insurance policies and an agent, had to look for budgets and reserve studies and a provider, had to read the association documents and scan the laws to see what he needed to know to get the right kind of help. He needed to locate contractors because if the streets were allowed to fall into disrepair or the front yards were no longer maintained well, there might be accidents or lost "curb appeal."  If rules were not sent out, they could have experienced an overabundance of vehicles and ended up with 5 or 6 vehicles parked face in or blocking driveways in the "mini courts".

    There is also a considerable amount of information available on the web ­ however, consider the source. Knowing how to operate legally and how to get what you need in place to do so is what keeps HOAs out of court. You can locate the Civil Codes at www.ca.gov by navigating to the state's 29 codes and you can pull up sections by code number, after searching the code itself or by a word search. In 2013 the Davis-Sirling Common Interest Development Act is found at Civil Code Sections 1350-1378. As of January 1, 2014, the Davis-Stirling Act will move to the 4000-6000 series of the Civil Code. ECHO has both the current and "new" versions of the Davis-Stirling Act on its website at www.echo-ca.org/law. Law firms have access buttons to the Davis-Stirling Act on their sites and you can find conversion charts from the old to new and new to old statutes on the CLRC site (California Law Revision Commission), and ECHO's website, and most law firms that advertise on the web. Don't get confused about DavisStirling.com. That is a law firm website strategically named, and although a good resource in many ways, it is often confusing to lay people who mistake it for a state agency site. Watch out for the sites that feed on negativity ­ such as complaints and threats. They offer very few solutions to any problem. If you are looking for help in doing things right, standing up as a board member, or resolving a dispute, stay with those sites that offer real help, including my site here.

    By Beth A. Grimm, Attorney. ECHO East Bay Resource Panel Chairperson, 2012 ECHO volunteer of the Year, a 20+ year member of ECHO and CAI, past Public Relations Chair of the California Legislative Action Committee (CAI-CLAC), and author of FINDING THE KEY TO YOUR CASTLE, THE CONDO OWNERS HANDBOOK by Sourcebooks, THE DAVIS STIRLING ACT IN PLAIN ENGLISH, 100s of articles, and more than 30 Primers on various topics. Visit the main page