2009 California HOA Legislative Update

With the end of year upon us, I thought it would be a good time to post a summary some of the laws enacted in California during 2009 that impact our local homeowners associations. This is not a complete list of all new legislation, but rather brief summaries of the statutes I believe will have the biggest impact on California HOAs. The full impact of 2009 California legislation on an HOA will require a more detailed analysis. Any HOA that has questions on the impact of a new law should consult with their corporate counsel.

Just a BillWith the end of year upon us, I thought it would be a good time to post a summary some of the laws enacted in California during 2009 that impact our local homeowners associations. This is not a complete list of all new legislation, but rather brief summaries of the statutes I believe will have the biggest impact on California HOAs. The full impact of 2009 California legislation on an HOA will require a more detailed analysis. Any HOA that has questions on the impact of a new law should consult with their corporate counsel.

1. AB 313 (Fletcher) Assessments

This statute will allow those HOAs whose declarations allow assessments to be based on the assessed value of the individual separate interests to continue to assess in this fashion, but will prohibit other existing and newly formed HOAs to do so.

2. AB 899 (Torres) Disclosures

This statute imposes three new requirements on HOAs. The first requirement is that the title of the Assessment and Reserve Funding form disclosure must now include the ending date of the fiscal year for which it was prepared, and the form must disclose the rate of return and inflation rate assumptions used by HOA in its reserve planning.

The second requirement this statute places on HOAs relates to agreements by members to receive delivery of documents via email, facsimile or other electronic means.  Such agreements must now comply with consumer consent and disclosure requirements of California Corporations Code section 20, and the Federal E-Sign Statute, 15 U.S.C. section 7001(c)(1).

Lastly, this statute adds a new section to the Davis-Stirling Act, Civil Code, section 1363.005, which requires every Association to distribute, upon request by a member, a document disclosure index identifying the disclosures provided by the HOA, along with a reference to the Civil Code section requiring that disclosure.

3. AB 1061 (Lieu) Water-Efficient Landscapes

This statute is one I have written about before here on HOA Brief. This statute amends section 1353.8 of the Davis-Stirling Act, and restricts an HOA’s architectural standards and other governing documents from prohibiting or providing conditions that hinder or prohibit use of low-water usage plants. In addition, this statute requires compliance with local water ordinances.

4. AB 1233 (Silva)

AB 1233 amends the Non-Profit section of the California Corporations code relating to nonprofit mutual benefit corporations (most HOAs in California are non-profit mutual benefit corporations). Subject to certain limitations, AB 1233 authorizes the articles or bylaws to require the presence of one or more specified directors in order to constitute a quorum to transact business. In addition, this statute prohibits a committee exercising the authority of the board from including as members persons who are not directors of the corporation. However, the statute does not prevent a committee which is not exercising the authority of the board from including a non-board member on the committee.

In my opinion, this statute is also the most troubling for HOAs. This statute also alters the protections afforded directors where the HOA had appropriate insurance in place. Prior to the passage of this statute, existing law prohibited a cause of action for monetary damages from arising against any director or officer of a nonprofit corporation, who served without compensation, on account of any specified negligent act or omission if the HOA had a general liability insurance policy in a specified amount in force both at the time of the injury and at the time the claim was made. With the enactment of this bill those causes of action now are only prohibited if the HOA maintains a liability insurance policy that is applicable to the claim. That means that if a claim is not covered, the directors may face liability, despite the fact that there is a general liability policy in place. I fear this will have a negative impact on the ability of HOAs to get people to volunteer and serve as directors. This is already difficult enough. There are many communities where people refuse to serve, and there are perpetual openings on the board. Now people who already hesitate to serve will have another reason to refuse to do so.

HOA Boards Need not be Afraid to Enforce CC&Rs.

“Enforcement-Phobia” is the chronic fear of the political, financial and social costs of taking action to enforce an Association’s governing documents.

The “disease” starts when directors and managers are blind to the real conditions of properties overgrown with weeds, cluttered with unapproved architectural changes and overrun with over-sized vehicles parking on too narrow, private streets.

Roger Wood of Carpenter Hazelwood in Arizona, just posted an article about a common problem facing Homeowners Association Boards in the current economic climate. This is an issue we have experienced here in California as well. He calls it “Enforcement-Phobia”.  According to Roger, “Enforcement-Phobia” is the chronic fear of the political, financial and social costs of taking action to enforce an Association’s governing documents.

The “disease” starts when directors and managers are blind to the real conditions of properties overgrown with weeds, cluttered with unapproved architectural changes and overrun with over-sized vehicles parking on too narrow, private streets.  The neglected home may be the source of great frustration in the neighborhood, but the Board responds with lackluster empathy and empty pockets. The deeper the disease digs into communities the less inclined an Association and its leaders are to take any action. Symptoms of owner neglect and Association ignorance of that neglect lead only to more neglect.

The key to treating the “Enforcement Phobia” is to realize that the CC&Rs, as well as the rules and regulations, are in place to uphold property values.  Failing to enforce them is a disservice to the community. As Roger points out, a Board has the power (and in Arizona and California at least, the legal obligation) to enforce the express terms of the association’s governing documents.  The disease can be stopped and the vicious spread of unresolved CC&R violations curtailed.  The cure for this phobia is simple to enforce the association’s documents.  Roger offers some good prescriptions for helping your community properly enforce its restrictions and to gain an owner’s compliance. Among them are:

  1. Be fair and consistent in your approach to inspecting properties and notifying owners about their violations;
  2. Have a comprehensive enforcement policy and follow it;
  3. If a particular CC&R provision is troublesome or universally unenforceable, amend it;
  4. Think about increasing fine amounts to levels that would deter owners from continuing CC&R violations;
  5. Communicate well and often with homeowners about violations and about the path to compliance; and
  6. Use self-help (if allowed by the CC&Rs) thoughtfully.

You can read the full article here.

Why would anyone live under those rules? Here are some good reasons for an HOA.

In researching topics for this blog, or just when I tell people that I my practice is focused on representing homeowners associations I often here some variation of “why would anyone live under those rules.

Car on LawnIn researching topics for this blog, or just when I tell people that my practice is focused on representing homeowners associations, I often hear some variation of “why would anyone live under those rules”.  Today’s Orlando Sentinel answers the same question.  Aside from the fact that in today’s market you often cannot avoid living in a homeowners association, the best reason to live in an HOA is that they protect property values by maintaining the look and aesthetics of a community.  Enforcement of CC&Rs can help when your neighbors don’t mow their lawn or let it go brown in front of their home. In addition, homeowners associations often provide social areas such as swimming pools, tennis courts and a clubhouse for socials, and are an effective alternative to calling city code enforcement when your neighbor parks his car on his front lawn. What positive experiences have you had living in an HOA?

What to know if you’re considering borrowing from reserves.

In California, Civil Code section 1365.5 makes it clear that a board may authorize a temporary transfer of money from a reserve account to an association’s general fund. However, such transfers are only allowed to meet short term cash flow requirements or other expenses.

borrowingIn the current economic climate, many homeowner’s associations are facing tough budget decisions as they are faced with an increasing number of members falling behind on assessment payments, while operating costs are rising.  In such circumstances, many boards are tempted to dip into reserves to meet their cash flow needs.

In California, Civil Code section 1365.5 makes it clear that a board may authorize a temporary transfer of money from a reserve account to an association’s general fund. However, such transfers are only allowed to meet short term cash flow requirements or other expenses. In addition, prior to the transfer the board must have provided notice to the members of the intent to consider the transfer in a notice of meeting stating why the transfer is needed, some of the options for repayment, and whether a special assessment may be considered. Any such transfers must be repaid to the reserve account within one year of the date of the initial transfer.  The one year repayment period may be extended briefly if the board gives the same notice required for considering a transfer and makes a finding, supported by documentation, that a temporary delay in repaying the amount borrowed from reserves would be in the best interests of the association.

The statute, as well as the board members fiduciary obligations, require that the board exercise prudent fiscal management in maintaining the integrity of the reserve accounts. The statute goes so far as to state that the board “shall, if necessary, levy a special assessment to recover the full amount of the expended funds within the [one year]”.

Any board contemplating borrowing from reserve accounts should seriously consider levying a special assessment to recover the amount needed to fund the reserves, and also consider increasing dues to meet operating expenses. In addition, if not already part of the budget, the board should consider budgeting for “bad debt” to ease the impact of late assessments on the overall financial health of the association.  Failure to do so puts the association’s assets at risk, and exposes the directors to claims for breach of fiduciary duties.

Your HOA board was not properly elected. Are its actions valid?

Are the actions taken by a board who may have been improperly elected valid?

VoteAre the actions taken by a board who may have been improperly elected valid?  This question can hamper the governance of an association by calling into question all actions taken by a board where there where some procedural imperfections in the election that seated the board.  California state Senator John Benoit has introduced AB 259 to reslove this issue.  AB 259 is intended to avoid disruption in the governance of an HOA by preventing the voiding of actions taken by a board when the board’s election had some procedural irregularities, unless the court finds that the action of the board was contrary to law or to the governing documents.

Once enacted, this bill should help any board facing a challenge to an election months after the election.