NOVEMBER, 1999 If you haven't been approached yet, you can expect to soon be approached by a telecommunications company representative that wants to install fiber optic cable in your development. These companies will be offering "state-of-the-art" services. They claim the local and long distance telephone services will have easy-to-understand pricing and features (won't that be neat). They claim you will have access to instant "super-fast" internet connections, up to 100 times faster than "dial-up" access. As for cable, they say they offer over 175 channels of "non-stop entertainment." They claim the rates will be hard to beat. These services will certainly benefit some members of the community, but you may get resistance from other members. In reviewing the contracts presented to you, these are the things that you need to watch for: Do You Have The Authority To Enter Into The Contract? The governing documents would be the key here. The documents need to be examined to determine if you have the right to grant easements (without a vote of the membership), and if you have the right to enter into "long-term" contracts. Some documents limit an association's right to grant an easement, but some also make exception for utilities, cable companies, or necessary services. Some governing documents limit the ability of the association to enter into "long-term" contracts without a reasonable termination clause. Have You Reviewed the Design Plan? The contracts should refer to some kind of design document, which lays out the intended placement of cable and boxes. If the association approves placement of cable or boxes on private property (such as on an individual lot in a planned development) without the owner's approval, the association is overstepping its authority. Have You Provided For Restoration of Property and Landscaping In the "Contract? The risks to the association when the cable guy starts digging include possible disruption of irrigation systems, gas mains, utilities, landscaping, etc.
SEPTEMBER 1999 LAMDEN STANDS FOR Judicial Deference To Board Decisions Where There Is A Plan On August 9, 1999, the Supreme Court of California ruled on a very important issue in the common interest development industry in the case of Lamden v. La Jolla Shores Clubdominium Homeowners Association (1999) 1999 WL 592099 (Cal.). The questions - who has the right to make the decisions about maintenance in a CID and what exactly must be done - the owner or the association? And what is the judicial standard of review of the decision? The development involved was a condominium project, but the decision itself has wide-reaching ramifications for boards of planned developments as well. The general question posed to the court was whether it should give deference to a homeowners association board's authority and presumed expertise, or whether alternatively the court should review the facts and circumstances and determine whether the board's decision was reasonable. The court examined a common-law concept, also embodied in Corporations Code Section 7231, called the "business judgment rule". The association in this case asserted that the rule should be applied in this case and the Court should accept the Board's decision. The court discussed this, and acknowledged that the common-law business judgment rule has two components: "one which immunizes corporate directors from personal liability if they act in accordance with its requirements, and another which insulates from court intervention those management decisions which are made by directors in good faith and in what the directors believe is the organization's best interest." The court said that the hallmark of the business judgment rule is that "when the rule's requirements are met, a court will not substitute its judgment for that of the corporation's board of directors." However, the court found that the business judgment rule did not directly apply to the condominium board's decision in this case. The board had before it the question of extermination and preventive measures for termites, which were a serious problem in the unit in question. The board chose secondary treatment measures (spot treatments) rather than primary measures (which would have required tenting of the building and complete fumigation). The court said the reason that the business judgment rule did not directly apply in this case was two-fold: (1) no individual directs were defendants, and (2) the association was not incorporated. (Note that individual board members had been named in the beginning, but apparently were dropped as defendants at the trial court level.) Instead of relying on the business judgment rule, the court adopted a standard of "deference" that sounds very much like one aspect of the business judgment rule. The court said: "Courts should defer to a to a duly constituted community association's boards presumed expertise, regardless of the corporation's corporate status, where the board, upon reasonable investigation, in good faith and with regard for the best interests of the association and its members, exercises discretion within the scope of its authority under relevant statutes, covenants and restrictions to select among means upon discharging an obligation to maintain and repair a development's common areas."
SEPTEMBER, 1999 LEASE LIMITATION RESTRICTIONS - ARE THEY LEGAL? I provide herein discussion of the legal considerations of lease limitation provisions. I understand that you are interested in knowing more about proposing a measure to your homeowners to change your CC&Rs to limit rentals in the development. Prior to doing so, you should consider the practical and legal ramifications (pro and con) to such a provision. Some industry people have questioned the legality of the lease and rental limitations in California. The courts of this State have not yet officially approved nor disapproved restrictions on leasing in common interest developments. However, the alternatives I suggest in this amendment have been tested in courts in other states with success. Additionally, there is a recent decision in California relating to a public housing development that allowed a complete ban on leasing (City of Oceanside vs. McKenna). I believe the authority found in cases dealing with the issue (in California and outside California) provides bases for the argument that lease limitation provisions are legal. Lease limitation provisions in documents certainly do deter excessive leasing of units, since they discourage purchase by investors or others who want uninhibited ability to lease their units. There are many developments such as yours in California that now want to look at lease limitation provisions. A lease limiting provision which is carefully drafted to meet problems raised in various court decisions has a chance of surviving legal challenge. This provision might never be challenged, and having adopted it as an amendment to your governing documents might be enough to achieve your ultimate goal of limiting leases and rentals in your development. What is the hang-up in California? There is a statute in California which prohibits unreasonable restraints on alienation of property (Civil Code ¤711) hence, the key to overcoming that statute is to approve a "reasonable" restriction. "Reasonable" restrictions include restraints that are rationally related to the problem you are trying to address, such as preserving the residential quality of the neighborhood. When proposing percentages for restrictions, relying on standards set by the secondary lending industry (FNMA, etc.), is a good way of supporting another purpose which is preserving the ability to obtain loans on properties. You may already be aware that lenders frown on approving loans in high rental percentage developments. I also believe that such things as "grandfathering" and "provisions for hards".
JULY , 1999 If there are indications of construction defects, your association needs a plan of action that could be followed which would best protect and preserve statutes of limitations and delays which might cut off reasonable claims. When I refer to "construction defects" or "potential construction defects", I am referring to construction or reconstruction, maintenance or repairs upon the improvements the real property of the Association. Whenever a board receives any complaints which indicate a possibility of a problem with the structures, buildings or improvements, a certain amount of investigation is required. The extent to which that investigation should be undertaken should be discussed with the association attorney. This phase could be referred to as "due diligence", or prudence. Under the statutory language in Civil Code Section 1365.7, it is clear that investigation into construction defect issues and making a decision whether or not to file a lawsuit is within the scope of the responsibilities of an Association Board of Directors and in order to protect each and every Director from individual liability, the Board members must act:
The next important protection for the Board of Directors comes in Corporations Code Section 7231 which 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. The Board should consider consulting the appropriate experts rather than making decisions based on surmise and "guestimates." Corporations Code Section 7231 entitles the Directors to "rely upon information, opinions, reports, or statements,....[by]...counsel, independent accountants or other person as to matters which the Director believes to be within such person's professional experts or experts competence...". In regard to protecting statutes of limitations in claims of the Association, the following limitations generally apply: Code of Civil Procedure Section 337. Written Contract. Any action upon a written contract does not extend beyond four years. Thus, if the Association was taking action against the contractors based on any language in the contracts, then it would have to be brought within four years of the date of the contract. If there is a warranty stated in the contract, then that warranty period would control at least as to the workmanship. Code of Civil Procedure Section 337.1 Construction/Patent Defects. This is a four-year statute of limitations on bringing actions against someone who performs construction for damages or injury to property (real or personal) arising out of a "patent" deficiency. A "patent deficiency" is a deficiency that is apparent upon reasonable inspection. This is a statute that may apply to your situation, and the four years begin to run four years after "substantial completion" of the improvement. Code of Civil Procedure Section 337.15 Construction/Latent Defects. This is a ten-year statute of limitations which bars bringing actions against contractors for recovery of injury to real or personal property arising out of a "latent" deficiency. "Latent deficiency" is a deficiency which is not apparent by reasonable inspection. Claims under this statute or the one above relate to deficiencies in the "design, specification, surveying, planning, supervision, or observation of construction or construction of an improvement to or survey of, real property." Code of Civil Procedure Section 338. A physical damage to private property. This is a three-year statute of limitations which applies in regard to bringing claims which relate to fraud or mistake. If in the investigation by the Association there appears any indication of fraudulent conduct or misrepresentation by the contractors, then this statue would apply from the date of discovery of that fraud or mistake. These defect statutes relate generally to the date of "substantial completion". Once an investigation has been made into complaints, and an analysis of the problem is made, then the Board is in a better position to analyze whether there are in fact deficiencies, and whether they are "patent" or "latent" defects, and whether claims should be pursued, or whether the association funds might better be spent on resolving the problems. This FYI is for general information only. It is not intended to serve as an official legal opinion because no determinations can be made by an attorney without more information. You should consult an attorney if there are complaints made or suspicions of defects, in sufficient time to complete due diligence before making a decision as to where to go next. You should be mindful of the basis time limitations that exist.
JUNE, 1999 FCC AND LANDLORDS, Exclusive Use Areas - The FCC Saga Rolls On [What the latest ruling means to landlord and tenants in common interest developments.] You may recall that a few years ago, I reported to you on FCC Rules 207 relating to satellite dishes and the restrictions that an association or planned development can still enforce. Then, a few months ago, I reported to the update to FCC Rules 207 that related to condominium developments where the owners owned property as tenants in common. The short of it is that, in planned developments, homeowner associations cannot prohibit satellite dishes, but they can restrict size, location, placement, and may require some reasonable screening or painting. In condominium developments, homeowner associations may prohibit the attachment of satellite dishes to the buildings or structures, but may not prohibit placement on exclusive use patios or balconies, or any other exclusively used area (so long as the item does not extend into non-exclusive common area). Most planned development associations that I am familiar with, and most condominium developments, have developed some kind of reasonable restrictions and an application process whereby both parties can be reasonably satisfied. The owner in most cases can have direct access programs, and in those cases the associations can be reassured that reasonable standards and restrictions are enforceable. The additional changes brought about by the amendments to Rule 207 involve the ability of a condominium association to offer a "antenna farm" or master satellite dish which owners could receive communications, but there were stipulations on the ability of the condominium association to utilize this procedure as an alternative. The resources in place had to offer the homeowners a wide range of services. I did not specifically address in any of my prior communications what rights were gained by renters, except to say that the definition of the consumer who is the subject of the FCC Rule 207 is expanded to include renters. In a news communication released November 20, 1998, the Federal Communications Commission adopted this order (FCC 98-273) further implementing Section 207 of the Telecommunications Act. First of all, the statutory change does not require landlords or homeowner associations to give up their property (including roofs and common areas) to permit viewers to install Section 207 devices on the common and restricted access areas. The Commission recognized that it would have raised serious Constitutional concerns. Exclusive use areas are, however, not quite so sacred and the FCC has made them more or less "fair game". So what does this mean to community associations? It means that while the association most likely has a policy of installing satellite dishes that relates to owners, the owners need to have a separate agreement with their tenants. In order to assist you with policies, I simply will state what I consider to be important to include in the policies between the associations and the owners, and the owners and their tenants. The following are important to all policies, in order to be able to enforce the restrictions that the FCC allows:
I have provided you with earlier FCC decisions that are not favorable to community associations. Some of the items that have been reviewed by the FCC are permit fees and pre-approval requirements. The FCC frowns upon permit fees and pre-approval requirements. I believe they perceive the permit fees to violate the restriction the FCC has placed on the processing that prohibits and unreasonable cost accruing to the homeowner or resident because of their desire to install the satellite dish. However, the question of extra security deposits for the landlord/tenant situation recently came up in advising some apartment clients. The apartment industry apparently feels that charging an extra security deposit is allowed under the FCC rules. It makes sense because installation of a satellite dish does affect the property to which it is attached, and the chances for damaging the property are great. In my research I could find no specific cases dealing with the security deposit issue, but is does seem completely distinguishable from the permit fees. If community associations want to look at charging an extra security deposit when they are allowing satellites dishes to be installed on property that the association is required to maintain. However, the difference between landlord/tenant law and community association law is that there is no authorizing statute for collection of a security deposit to protect against damage to property. Therefore, it would be my suggestion to any homeowner associations that wish to collect a security deposit from owners (on behalf of themselves, their family members, guests, residents or tenants) would be that the authority come from a CC&R Amendment. If an association simply adopts a policy and begins requiring a "security deposit" from any owners where satellite dishes are to be installed, I believe the association may run into legal issues related to the authority to collect the security deposit. However, if an amendment to the CC &Rs is proposed and adopted by the membership, it would be clear that the authority would come from the regulating documents. Any challenges to the security deposit in that particular situation might be sustainable based on the fact that allowing the satellite dish to be affixed to property maintained by the association will certainly affect its ability to maintain the property and may require removal or repairs to the surrounding property. In regards to security deposits in general, it has long been my feeling that they are not an authorized expense in homeowner's associations unless they are incorporated into the governing documents either through modification or restatement of the documents, or a "spot amendment". Other attorneys might disagree.
APRIL, 1999 PERHAPS IT IS TIME TO TAKE A SERIOUS LOOK AT YOUR CC&Rs! There have been substantial changes in California Law in the last ten years. Perhaps it is a good time to take a look at your Articles, CC&Rs and Bylaws, with a view toward proposing some updated governing documents, or amendments, to your Membership. These are some of the most significant changes:
These are just a few of the important changes that should be embodied in your governing documents. If the Association is not in a position at this particular time to propose amendments to the governing documents, at the very least, the Association should have a policy which should be attached to or distributed with CC&Rs outlining the changes in the law that impact the CC&Rs. If the Association adopts such a policy, and attaches it to any governing documents that are distributed, and has access to it in the Board records along with any documents that might be reviewed for guidance, the Board of Directors is most likely to run afoul of the new laws. It would be a good idea to agenda this item for discussion at an upcoming Board meeting.
SEPTEMBER, 1999 LEASE LIMITATION AMENDMENTS - ARE THEY A GOOD IDEA? When associations ask me to prepare lease limiting amendments, I provide the following discussion of the legal considerations. Attemping to limit the number of units in the development that can be leased has some ramifications. Some industry people have questioned the legality of the lease and rental limitations in California. The courts have not yet officially approved nor disapproved restrictions on leasing in wholly private common interest developments. However, the CC&R amendments I write are to specifications that have been tested in courts in other states with success. Additionally, there is a past decision in California relating to a public housing development that allowed a complete ban on leasing. I believe the authority found in cases dealing with the issue (in California and outside California) provides good legal argument that lease limitation provisions should be upheld. Lease limitation provisions in documents certainly do tend to deter leasing of units, since they discourage pur-chase by investors or others who want the ability to lease their units. There are many developments in California that want to look at lease limitation provisions. A lease limitation provision which is carefully drafted has a chance of surviving legal challenge. The provisions might never be challenged. Having one might be enough to achieve your ultimate goal of limiting leases and rentals in your development. What is the California standard? There is a statute in California which prohibits unreasonable restraints on alienation (sale or transfer) of property (Civil Code ¤711). "Reasonable" restrictions are those that are rationally related to the problem you are trying to address, such as preserving the residential quality of the neighbor-hood and the ability to finance sales. When choosing a percentage for the restriction, relying on standards set by the secondary lending industry (FNMA, etc.), is a good objective guide. These guidelines regulate obtaining loans on and refinancing properties. You may already be aware that many lenders have tightened up on approving loans in high rental percentage developments. "Grand-fathering" and "provisions for hardship" are matters that need to be addressed in such an amend-ment to make it "reasonable". What are the advantages to a lease limitation provision?
What are the disadvantages of a lease limitation provision?
What does it take to pass an amendment? The CC&Rs should specify a percentage needed for approval of an amendment. Generally, you can count on opposition from those persons already leasing properties in the development, unless there is a "grand-father" clause which excludes those people from the limitations. Thus, at the very least, I usually suggest a "grand-father" clause exempting those people with current leases. Some CC&Rs require lender approval in addition to membership approval. If lender approval is required, you may get mixed opinions from the lenders. 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.
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