AMENDING GOVERNING DOCUMENTS -IT DOESN’T HAVE TO BE PAINFUL!!

by Beth Grimm

• Were your governing documents drafted before 1995?
• Is the Developer out of the project?
• Do your documents seem to relate to some other association?
• Are some of the provisions absurd, obsolete or unenforceable?
• Are your CC&Rs impossible to understand? To interpret?
• Are you baffled by your Bylaws?
• Are there conflicting provisions in your documents? Discriminatory language?
• Are you considering seeking bids for D&O or general liability insurance coverage soon?
• Is the Association considering applying for a bank loan?
• Are there an unusual number of homeowner/association disputes arising?
• Do your documents prohibit solar installations? Day care centers? Real estate signs? Satellite dishes? Families with children? Pets?
• Is your Board fighting over whether it is time to amend or not?

If the answer to any of these questions is “YES” – you need the information in this newsletter – it may be time to amend! Maybe it’s not as bad as you think!

WHY DO DOCUMENTS NEED TO BE AMENDED?

Drafting Inadequacies and Boilerplate Documents: The “governing documents” for a community association include the Articles of Incorporation, the Bylaws, the Declaration of Covenants, Conditions and Restrictions (commonly known as the CC&Rs or the “Declaration”) or other regulating documents, and rules which govern the operation of the association. (Civil Code Section 1352 (i). They are originally drafted by the developer and generally must “pass through” and receive approval of the California Department of Real Estate (DRE) so they are subject to “reasonable arrangement” regulations of the DRE. Obviously (from some of the documents I have seen) developers commonly use “boilerplate” Bylaws and CC&Rs which contain pages and pages of useless provisions. Additionally, the documents also often contain provisions intended to meet the regulations of the secondary mortgage market (FNMA and FHLMC), but that are otherwise not “user-friendly”. While advantageous in some ways – the addition of these provisions create complicated and unwieldy documents. Many of the provisions are unnecessary.

Maturation Process: As associations mature, things change. Once the developer (often referred to as “Declarant”) is out of the development, all provisions in the documents related to the declarant become inapplicable, cumbersome, and confusing … and unnecessary. There is a process for eliminating these provisions in the Civil Code, but it requires approval of a majority of members, so it makes a lot more sense to update the documents that require owner approval at the same time you are removing references to the Developer.

Superseding New Laws and Legal Standards (Established In Cases): In 1980, the Non-Profit Mutual Benefit Corporation Law section of the Corporations Code (Sections 7110 and following) became effective. This body of law regulates the administration of community associations that are incorporated (and serves as a good legal guide for those which are not). It contains laws relating to organization, reformation and dissolution of the corporations; meetings; voting rights and procedures; members and Boards of Directors responsibilities, obligations, removal and liability; and records inspection rights. In 1986 an entire body of law relating specifically to the administration and operation of common interest developments (CIDs) became effective (The Davis-Stirling Common Interest Development Act, Civil Code Sections 1351 and following). That Act has seen many, many amendments since 1986 that should be incorporated into the governing documents. Most of the material changes supersede existing document provisions, but confusion arises and disputes fester when the documents say one thing and the Board is told about laws that homeowners never heard of. And recently, the California legislature has revamped the entire process for ADR (including IDR), reserves disclosures and borrowing, records inspection and rule-setting. Boards need to understand the obligations imposed. If the Association is lacking the advice of a knowledgeable professional in its daily operations or its amendment process, it may miss out on these changes and it may end up operating illegally!

Other statutory changes and cases have made some restrictions unenforceable and in some cases, illegal. For example, community associations may not prohibit the flying of flags (Government Code Section 434.5), installation of satellite dishes (in planned developments, FCC Rule 207), display of real estate signs (Civil Code Section 712-713), solar installations (in planned developments – Civil Code Section 714), reasonable modifications to accommodate the disabled (Civil Code Section 1360), pickup trucks (Bernardo Villas case), day care operations (Health and Safety Code Section 1597.40) or residential care facilities (Health and Safety Code Sections 1500-1567.8). Associations that do not qualify specifically as “seniors” communities may not enforce age restrictions, thanks to the Fair Housing Amendments Act of 1988. Even the presence of such restrictions, if not appropriately enforced or removed, can create problems for associations. Where outright prohibitions on the noted activities exist, the documents should be amended. Associations are entitled to adopt reasonable restrictions on all of these actions that provide some protection and relief to the association and its members without violating the law. But again, if you are not working with a knowledgeable professional that understands all of these issues, you may be headed for trouble.

SB 1148 (Civil Code Section 1352.5): Your Association is at risk of there is any language in the documents that is discriminatory. Effective January 1, 2000, and amended January 1, 2001, Senator John Burton was successful in passing a bill into law that will make an Association automatically guilty of discrimination if the governing documents contain any language that can be construed as discriminatory. Do your documents prohibit renting to other than single families? Do you close the pool to all minors (those under 18 years old) unless accompanied by adults? Do your documents single out children for enforcement? Any of these and many other regulations might cause the Association problems if incorrectly enforced, and a legal “audit” of the documents is critical. The law allows a board to remove discriminatory language and rerecord the documents (with certain technical requirements to be followed) but the law does not allow replacement of language with something different without a vote. The documents may need amendment for this (to avoid penalties) so it is a good time to have them reviewed and face the bigger project in conjunction with the necessary “cleanup”.

Restated And Updated Documents Are A “Plus” In Dealing With Lenders And Insurance Professionals: If an association is considering applying for a bank loan or seeking insurance bids, having updated documents that conform to new laws helps. Some insurance companies will not even give bids to associations for Directors and Officers acts coverage if the Bylaws are outdated. It makes sense from the standpoint that if the Bylaws do not reflect legal operations, obligations, and limitations, how will the board members know what they are responsible to do? If the CC&Rs are not up to date, there is no guide for Boards and owners as to the responsibilities with regard to maintenance and use of the properties. Naturally, to a lender or insurance professional, such an association would present a higher risk than an association with updated documents.

Legislative Intervention/Possible Oversight: The Legislators in California are prolific when it comes to adding statutes and micromanaging boards. Besides the legislation that has already been passed that overrides governing documents, there are always bills in the hopper that affect the way an Association operates. In 2005, one legislator proposed many restrictions to voting and elections processes which, if they become law, will make it more difficult for Associations to conduct any kind of voting campaign, including updating documents. There is a bill that would require associations to have all ballots for measures that are conducted by mail sent to a third party for counting. Since mail ballots are the preferred method of presenting document amendments, for many reasons, this process would hinder the Board’s ability and flexibility needed to receive and count ballots and determine if more mailings or contact is needed to get the membership involved. Apathy plus complicated and difficult voting processes will make it even harder to get the document updates and restatements approved by the membership in the coming years. The legislative bills could become law next year; so waiting to dive into this process may complicate it further. Additionally, the California Law Revision Commission is sponsoring legislation for a CID (common interest development) Oversight Agency which will could come to fruition in the next few years. Attempting to operate or manage an association with outdated documents may well invite criticism and punishment for the innocent (uninformed) volunteers. Its important to consider the update/restatement process very seriously.

HOW DO YOU AMEND?

Governing Documents: An Association has various ways to amend the governing documents. The most obvious is, of course, under the direction of the existing governing documents. But the inquiry does not stop there. Some laws even affect the language in the existing documents.

Civil Code Section 1355 (a): To paraphrase, this statute says the Declaration (CC&Rs) may be amended either by the provisions in that document or by (a) obtaining the percentage of approving votes required by the CC&Rs and (2) recording the CC&Rs along with official certification that the required percentage of approval by homeowners was given, signed by the appropriate officer of the association (if one is designated in theCC&Rs, that is who it should be). The purpose of this statute was to alleviate the requirements in many existing CC&Rs that the signatures of members approving must be on a “written acknowledged, and/or recorded instrument.”Abiding by this provision would require each owner’s signature to be notarized and in this day and age with apathy and other problems, that would reasonably inhibit the ability of most associations to successfully complete the process of updating the CC&Rs.

Civil Code Section 1355 (b): Although this code section “hibernated” for a few years, it really never left the printed code books. It was officially revived, however, on January 1, 1994. It says that except where the CC&Rs specifically prohibit amendment, an Association can amend by this statute. In order to comply, an association must distribute the proposed restated or amended CC&Rs to all owners by first-class mail or personal delivery 15-60 days before the voting cutoff date, more than 50% of owners must approve, the certification of the appropriate association officer (as described above) must be made, the CC&Rs and certification must be recorded, and the recorded CC&Rs and certification must thereafter be provided by first-class mail or personal delivery “immediately” upon recordation.  The statute is clearly helpful when the CC&Rs contain no specific provisions to amend. If your documents contain language limiting times to amend, etc., consult your legal professional as to whether you can take advantage of this statute.

Civil Code Section 1355.5: This law, effective January 1, 1993, is a good example of how Legislators can take a good idea and screw it up!  The measure was introduced as a means to make it easier for Associations to amend or restate the CC&Rs to: (1) remove confusing “declarant” provisions after the developer was out of the project, and (2) update the documents to reflect new laws that superceded document provisions. No homeowners vote would need to have been taken for these limited purposes. The Legislators in all their wisdom somehow ground the language and concept up to the extent the final product required (in this attorney’s view) a more technical and complicated process to remove “declarant” provisions.  The provisions that may be deleted are very specific and do not include voter provisions. (Removal of the two-class voting structure, once it was no longer applicable, was one of the problems supporters of the Bill were trying to fix!) Updating documents to conform to new, controlling laws was left out completely. While the amendments allowed by the statute could be approved by a majority of the homeowners at a duly called meeting where a quorum is present, it makes no sense to the author to use this procedure as a substitute to update or restate.  It falls drastically short of being useful for any substantial purpose. If the Association is going to the trouble of redrafting to remove developer provisions, it might as well do it right and update to the new laws at the same time.  The statute, if it serves any purpose at all in its present form, serves only a very narrow one.

Civil Code Section 1356: This statute provides recourse for an Association to seek court approval of amendments where it cannot achieve the “super majority” of approving votes required by the CC&Rs from the homeowners. The statute contains very specific procedural requirements and certain attestations must be made. The “bottom line” though, is that the Association must have made very diligent efforts to get the members to vote.  More than 50% of the homeowners must have approved the amendments. The intent of the statute is to prevent the process from being frustrated because of apathy – not to give the Court the almighty power to approve document amendments. A Board should never count on it until after the “yeoman’s effort” to get voter approval has been made. Beware if you hear words to the effect: “Don’t worry about amending, if you can’t get the votes from the owners, you simply GO TO COURT.”]  It isn’t quite that simple. It’s costly, time consuming and sometimes frustrating and unrewarding. In one situation in a development with over 2000 owners, the Judge required the board to personally serve each and every homeowner with the petition to seek court approval before he would hear the case. The Board gave it up, after spending two years trying to get the documents approved, because of the prohibitive costs of personal service. If the proper effort is made on the “front side” of the process, it should not be necessary to go to court, but this statute is available, nonetheless.

Civil Code Section 1357: This statute simply provides a means of extending the term of the Declaration (CC&Rs) where none is provided in the document itself. More than 50% of the owners must approve and the recording and certification process is generally the same as recited above.

Corporations Code Sections 7150 and 7819: These sections provide means to amend Articles of Incorporation and Bylaws where none is provided in the documents themselves. They are not often needed because most Articles and Bylaws either provide for amendment by approval of a majority or less of owners (and that usually can be achieved), or it is not practical to amend them without also amending the CC∓Rs (if an association is trying to update its governing documents and so the CC&R; percentage is the goal).

WHY IS IT IMPORTANT TO USE A KNOWLEDGEABLE PROFESSIONAL TO ASSIST?

Obvious Reasons: The most obvious reason to use a knowledgeable professional is so you don’t end up with more problems than you had before you amended! You may burn out your CC&R committee by sending the people on the wrong errand. An experienced consultant will know the pitfalls and be able to suggest how to conduct a successful campaign. There ARE MANY additional good reasons to deal with someone who has experience, education and knowledge in this arena.

Not-So-Obvious Reasons: Mortgagee Protection Provisions: Many association documents contain what is often referred to as “lender protection provisions.” An association may be required to get “lender” approval of the amended or restated governing documents because of these specific requirements found in the original documents. A knowledgeable consultant may be able to provide suggestions for reasonably dealing with these requirements, and/or provide information about avoiding these requirements legally.

Voting By Other Entities: Some documents contain provisions that, if amended, require the approval of cities, counties, and/or other entities. In cases like these, the attorney must help determine who actually gets to see proposed amendments or revised documents, who must approve, and/or how changes might be made or provisions preserved to eliminate as many of the parties who must actually approval as possible. The attorney must be able to work with these intertwined agency provisions in such a manner that in the final set of documents it is perfectly clear as to who gets what rights, etc. This is no easy task for an inexperienced person!

Knowledgeable About Problems That Might Arise During The Process: In helping associations deal with this complicated but all important process, it is an advantage to have a professional that knows how to set up a process that will prevent legal challenges from arising due to the process itself. For example, in King v. Oakmore Homes (1987) 195 Cal. 3d 779, 241 C.R. 140, the Court invalidated votes to amend the CC&Rs because only one owner signed the ballots, rather than both husbands and wives, etc. The association in that case had a Bylaw provision that dealt with joint action and the Bylaw provision was not satisfied. All of that work for nothing. A knowledgeable attorney could utilize that decision for two purposes: (1) to make sure that the new Bylaws provide that when only one owner signs a ballot, that binds other owners of the same unit and (2) address this issue on the written ballot by stating that even if fewer than all owners sign, the association will presume all owners to be in agreement.

Future Legislation: Working with an attorney that is involved in the legislative process is a bonus. The legislators and California Law Revision Commission follow patterns and anticipation of upcoming proposals and wording in statutes can be important. Knowing what focus is placed on certain areas is very helpful in writing documents that can incorporate new laws as they are adopted. An attorney that is in tune with these processes can anticipate areas of change, provide language intended to be more fluid than static, and draft from a better position of understanding trends such as the recent wave in legislation to require “fair and equitable” standards, reasonable timelines, due process, etc.

Other Considerations: An experienced professional can assist the association in working through the process successfully, keeping the association representatives on track, advising on homeowner communication, and setting up a campaign geared for success. The attorney can identify problem areas that require extra consideration or that might be better handled through a ballot measure separate from the “package” involved in a complete restatement, simply because of their complicated or controversial nature. [A good example is the special consideration and handling that should be given a first-time lease limitation provision.] An experienced attorney can help the board determine what should go into the CC&Rs and what should be reserved for the rules, and discuss the importance of document integrity and hierarchy, and keeping flexibility where needed. It is important in the process to identify potentially controversial provisions so that the ability to get the approving votes is not inhibited by one political “hot potato.” It’s helpful to know when it might be advisable to separate out a particular provision for voting separately.

A SIMPLE TIME AND COST EFFICIENT PROCESS

The process of amending does not have to take a year or burn out good board members. The following describes the process used by Beth Grimm, an experienced CID attorney.

FIRST (OR SECOND) STEP: With the help of Attorney’s suggestions, Association communicates with and solicits input from the homeowners. Communications and requests for input are done through newsletter, surveys, and sometimes, town meetings, etc.

SECOND STEP: Association representatives appointed to work with attorney (Board and/or Committee) complete questionnaires supplied by attorney which ask questions geared to identify problems experienced by the association that might be dealt with in the revision process. problems. Association returns fee agreement and all governing documents along with the questionnaires.

THIRD STEP: Attorney drafts a new set of documents, incorporating the new laws, drafting provisions to help alleviate the identified problems, as well as adding some provisions that assist associations (based on experience with generally prevailing association issues). This set of documents includes the basis revised Articles, Bylaws and CC&Rs, and it also includes a written ballot for voting purposes, a proposed letter to send to the homeowners that indicates the importance of approving the new documents, and a letter to the Board ofCC&R committee explaining the documents, many of the changes. (Estimated “turn-around” time for this process – one month).

FOURTH STEP: Attorney submits all revised documents, letters and ballot to the Board or Committee Chair and asks that copies be distributed to all committee members (or the Board, if no CC&R Committee for review. Attorney asks that all recipients to make all notes, questions, changes, etc., on their copies of the documents to assure that all parties are working from the same source. Attorney asks for a meeting to be set 2-3 weeks from the date this first draft is provided to meet with the Board or Committee members (face-to-face or by telephone conference call if face-to-face cannot be arranged).

FIFTH STEP:Meeting with Board and/or CC&R Committee and attorney is held and documents are reviewed page-by-page. All questions, concerns, and proposed changes are discussed. Attorney makes revisions to the extent possible at that meeting as the parties go through the documents. All questions are answered. This meeting serves two very important purposes. First, it moves the association one step closer to finalizing the documents. Equally as important, it educates all parties present as to the questions that tend to arise the most. Provisions that are misunderstood by any person present are explained. Although all efforts are made to eliminate difficult “legalese” to the extent possible in the first draft, there still often remains some language related questions that can be eliminated by simply drafting changes. The people at this meeting should be able to answer just about any question a homeowner may ask by the time this session is over. The documents should be ready for finalization – or – any serious political “hot potatoes” should be identified and a plan in place to deal with them. (Occasionally, but not often, it becomes evident that further homeowner input is warranted after this process and before finalization of the documents and the next step is delayed. Sometimes a homeowner town-hall type of meeting is requested.)

SIXTH STEP: Attorney makes changes as needed and returns a finalized set of documents, a written ballot, an accompanying letter to the homeowners (from the Association Board) that can be reproduced, and an explanatory letter to the Board about how to process should work. Timelines for voting are suggested, a specific follow-up campaign is recommended, and advice on extensions of the process are defined.

SEVENTH STEP: Association has the ballots and documents reproduced and conducts voting process through the mail (usually takes 30-60 days).

EIGHTH STEP: Association calls attorney and sends written documentation stating that the documents passed! Signing, notarization and proper recording of the documents and certifications are completed. Attorney gives instructions on homeowner notification.

The question always arises as to cost: Please keep in mind that the above information is based on the suggested process of Attorney Beth A. Grimm and may not reflect the processes of other attorneys. Estimates for amending governing documents by attorneys in this state range from $2,500 (for a boilerplate set) to more than $10,000. Boilerplate documents (generally those in the range of $2,500 leave Boards in a quandary since there is such diversity in Associations and little diversity in boilerplate provisions. If you are given an estimate of $8,000-$10,000, you will likely pay more than you need to. Granted, estimates can be misleading because if a Board or difficult members protract the process; or property description issues, review of outside agreements for incorporation into documents, multiple requests for changes or other matters that arise require extra investigation, time and review by the attorney, the costs might increase significantly. A good attorney will advise along the way if processes are needed that weren’t described in the original estimate. If you are stuck with an inexperienced associate attorney in this process or an attorney that doesn’t focus on document amendment projects, costs can increase considerably and you will not get the benefit of experience and practical problem-solving thinking that goes into the update/amendment process. Amending the documents with experienced advice allows a Board to cure some of the common “ills” of the day-to-day operations). Boilerplate documents are what you get from having to comply with the DRE processes (Department of Real Estate) or provisions taken out of a form book. Meaningful, readable, trim, plain English and useful documents are what you get from a good drafter with years of experience in Association operations, common issues, complicated matters and the legislative processes.