verview "Micromanagement" is the name of the game in California. The Legislature in California has become more and more proactive with regard to homeowners’ associations over the past few years. It has always been active, and every year there seemed to be some pieces of legislation that affected homeowner associations on one subject or another relating to operations. Now, legislators are beginning to offer legislation that is purportedly for the "protection" of homeowners. The Davis-Stirling Common Interest Development Act first became effective January 1, of 1986 and contained an entire body of law related to homeowners’ associations. There is an additional layer of laws relating to incorporated associations (those that are non-profit mutual benefit corporations) which became effective January 1, 1980. It is believe that most homeowner associations in California are incorporated. The corporate codes are found at Corporations Code Section 7551 et. seq. The Davis-Stirling Act is found at Civil Code Section 1350 et. seq.

In the last four to five years, the legislators are giving more and more credence to constituent pressure, perhaps not entirely voluntarily. The homeowners in California really have nowhere to go when they come to their wits ends about issues with their homeowner association, other than court (which of course costs big bucks), so they go to their legislators and seek change. The average complainant cannot afford legal fees. Some write to the Attorney General’s Office for relief. While the Attorney General’s Office does have jurisdiction over homeowner associations that are incorporated since they are non-profit mutual benefit corporations, that office often declines to get involved, and often recommends that the people consider civil action and get legal advice on their own. The Office of the Attorney General is not staffed sufficiently to deal with homeowner association issues. Some Owners even go to the local newspaper, and the newspapers have been picking up stories about flag flying, foreclosures and other matters of emotional interest to homeowners in California.

Newspapers obviously appreciate sensational stories about something horrible that a homeowners’ association board of directors seems to have done to a homeowner. The reporters are equally unimpressed with articles lauding the efforts of volunteers serving on the boards. Between the legislators and the news media, homeowner associations in California have gotten a rather bad reputation. Therefore, many of the legislators can find support when they decide they want to push a bill that is tough on Boards. The can tout it as "consumer" legislation. And micromanagement has become something that CLAC (the California Legislative Action Committee) fights on a constant basis. In addition, the California Law Revision Commission (CLRC) has been tinkering with architectural standards and procedures and rule making authority (see paper of James Lingl, preceding this one).

Moving from the Meaningful to the Invasive

The Legislature’s tinkering used to be more or less limited to matters of general operations and fundamental public policy issues. The Legislature passed a bill invalidating deed restrictions that prohibit daycare centers for up to six (small, later expanded to eight) to twelve (large, later expanded to fourteen) children, finding that people needed child care close to home and residential neighborhoods were desirable places for daycare. [See Health and Safety Code Section 1597.40.] The Legislature also, because of a shortage of appropriate housing, approved group homes of up to six elderly or disabled residents, finding a need for locating these homes in residential neighborhoods. It is inappropriate for homeowner associations to prohibit such group homes; next came a law providing for “Sober Living Homes” in residential neighborhoods. [H&S 1502 and1566.3] The Legislature has ruled on signs, allowing one real estate sign of reasonable dimensions [Civil Code Sections 712 and 713], and allowing solar panels on roofs of many CIDs [Civil Code Section 714], and allowed satellite dishes that could not be seen from the streets or common area [Civil Code Section 1376 - later trumped by FCC Rule 207]. In the past few years the Legislators have moved away from public purpose and into the area of more intrusive micromanagement, introducing legislation limiting Association rules against motorcycles (unsuccessful, largely because of CLAC’s efforts) and pets. As you can see in the paper written by Jim Lingl, even though CLAC fought off the pet bills for several years, the Legislators eventually passed a law that said that homeowner associations could not prohibit owners from keeping one pet. [Civil Code Section 1360.05].

These days, nothing is sacred, even with the CLRC specifically addressing certain areas of concern. The Legislature passed a law effective January 1, 2001, that governs hearings on disciplinary actions. A board of directors must give owners at least 10 days' written notice by first-class mail or personal delivery (e-mail is not an option listed) of a meeting at which the board is intending to consider disciplinary action. The Association must list the violation and the pertinent document sections that apply, and the disciplinary action that will be considered, in the notice. That meeting may be held in executive session - and the homeowner is allowed to be present. There are varying interpretations of the law (among practitioners) as to whether the homeowner has the right to be present during deliberations. Once the board comes to a decision on disciplinary action, within 15 days, it must notify the homeowner, again, in writing, by first-class mail or personal delivery, of its decision. That doesn’t sound so bad - of course homeowners deserve notice and a chance to respond when the board is going to be considering the disciplinary action. However, requiring a hearing to fine an owner for leaving a garbage can out for days on end or putting a couch in the dumpster requiring an extra pickup requires more board involvement because of such statutes than many would find necessary. And the statute goes on to say that if the board does not comply with this statute, the disciplinary action is invalid. Besides complicating matters that could otherwise be handled very simply, these kind of laws complicate the process of interpreting governing documents that already set forth a hearing process of some kind, and other applicable laws such as the Corporations Code which also provides guidance for disciplinary hearings. This kind of tinkering requires “high maintenance” (ongoing professional assistance) to determine which of the many regulations controls over the others. Most self-managed Associations are more or less doomed to fail the tests of the legislative micromanagement.

The California Law Revision Commission (CLRC) Processes

The CLRC, before proposing the most recent rule discussed in Mr. Lingl's letter about rule making authority which requires pre-imposition notice and gives the homeowners the right to challenge the rule, previously was proposing a requirement that homeowners would have to approve certain rules and regulations relating to conduct. CLAC jumped on that one, and offered the following embodied in letter to the CLRC (also taking advantage of the opportunity to jump on the misuse of the words "due process" by the CLRC):

[CLAC TO CLRC in November 2001] "This Memorandum [referring to a published memorandum of study and proposed resolution] deals with non-judicial dispute resolution and speaks of “due process” in association rule making and decision making. The words “due process," should not be used quite so freely in the homeowner association context, because they imply state action is involved in these statutes. Homeowner associations in California are not governmental or public entities, and the actions of boards and directors do not constitute state action, although the question has been debated in courts throughout the country. Certainly, within homeowner associations there is the necessity of fair processes (an alternate phrase used in the Memorandum) geared to give owners adequate notice of what types of conduct and activities are expected, what things they might do that might trigger hearings and/or disciplinary action, and what types of things are discouraged or even forbidden. CAI-CLAC would simply ask the committee to either use the words "due process” more judicially, or leave them out of the process all together, speaking instead to the concept that is equally important of "fair processes." Suggesting "due process" is required is suggesting the Constitution applies to Association governance and it does not.

... This Memorandum also deals with rules of the association. The paper suggests that member approval should be required to approve rules for the association. The discussion is thoughtful, and comes to the conclusion that some rules should require member approval and others should be sufficient for the board to determine. The difference seems to be in conduct and use of the common area (for those that should not need member approval), and those that relate to conduct of individual with regard to his or her separate interest lot or within their home (suggesting those rules need to be approved by the members). That delineation doesn't make sense to those that are assisting associations in trying to enforce governing documents for which a legal obligation exist). Many CC&Rs already limit activity within a separate interest in the area of pets, noise, window coverings, etc. indicating importance in controlling the separate interests is on the same level and controlling common area. Activities that occur within a unit that threaten or destroy the quiet enjoyment of neighbors should not be subject to a requirement that owners need approve or disapprove of rules prohibiting such conduct.

The members of an association, especially the very large percentage that exists in most associations, tend towards apathy and disinterest unless something is happening that directly affects them. Members don’t generally respond to the needs of leadership and direction for the association when surveys or voting measures are circulated. Individual members who don't provide service or participate do not have the first-hand knowledge that board members have in regard to use of the common area, problems that arise, and complaints that are commonly presented by neighbors or residents within the association. Since they are not privy to that information, and furthermore, historically don’t tend to read or understand the governing documents of the association, and don't carry any individual liability or responsibility for enforcement, they should not be put in the position of setting rules and regulations for the operations and administration, and conduct of residents, of the homeowner association. It would make more sense to commit the board of directors to an obligation of notifying the owners of any proposed rules and regulations before they are implemented, and have a comment period of 30 days. This would avoid a situation where an owner ends up receiving punishment, disciplinary action, a fine, or being impressed with costs, when they don’t know of a particular rule or regulation that exists. It would provide owners the opportunity to comment before a rule becomes effective.

Homeowners in homeowner associations are known for not reading the existing governing documents of the association except maybe for the rules and regulations, which are written in simpler terms than the Declarations of Covenants, Conditions and Restrictions and other more formal documents. Any board of directors should circulate any rules and regulations that are being considered by the board at least thirty (30) days before they are implemented (possibly 45, because of the constraints mentioned in the text above). If the board of directors announces or sends notice that they will be discussing and considering implementing any rules at a board meeting, homeowners have the right to attend and even to address the board personally. If people in the association thought a rule was poorly proposed, detrimental, unfair, or anything else they could provide feedback so the Board would be aware if there was widespread dissatisfaction with a proposed rule.

CAI-CLAC sees no good reason to differentiate between conduct in the common area and conduct in the separate interests, especially in view of the fact that boards of directors are often targeted with complaints of neighbors because of loud noise, smells, or those kinds of things that emanate from the unit when units are in close quarters. The board of directors should not be limited to choosing the rules for common area parking spaces, facilities or the association, etc. Forcing a membership vote on any rules that relate to the kinds of conduct that are disturbing to the neighbors is unrealistic and probably unreasonable, given the state of apathy that generally exists in California in homeowner associations.”

At least the CLRC listened to CLAC on this subject. The proposed rule making language was changed to require prior notice (not voting), and give the members the opportunity to challenge a rule.

While Intentions May Be Good, Potential Fallout (Law of Unintended Consequences) Is Often Disregarded

It wouldn’t be so bad if the Legislators fully understood the ramifications of “knee-jerk” legislation. Effective January 1, 2001, a new law that had been proposed by Senator John Burton, a powerful legislator in California, prohibited discriminatory language from appearing in CC&Rs. The rumor was that the Legislator was contacted by a constituent that found a discriminatory provision (“Caucasians only” deed restriction in very old set of restrictions) and was incensed by it. The bill that was introduced was overkill. Besides requiring homeowner association boards of directors to include coversheets with all governing documents distributed that said any discriminatory provision was void and would not be enforced, it required the local County Recorders to delete language from recorded documents if asked. The bill also required the HOA Boards to delete (eradicate - make disappear) all discriminatory language in documents, and re-record the documents, whether asked or not. Requiring volunteer boards of directors to interpret discriminatory clauses, and make adjustments was impractical. Sending out newly re-recorded documents to owners was expensive (one association affected had over 18,000 members and the mailing costs alone for such a process would exceed thousand of dollars). The Boards are not qualified to decide what may or may not be discriminatory. The law didn’t define discriminatory language, so confusion reigned almost immediately. Questions arose relating to whether the intention was to prohibit occupancy limitation clauses or “single family residence” language, and other sorts of restrictions that might be considered discriminatory under certain circumstances. In fact, the law, as it was finally written and accepted by the Legislators, forced county clerks to do something that violated existing laws with regard to the recording statutes. Even worse, the new law arguably would have required bona fide seniors communities to eliminate age restrictions altogether (even if they previously qualified under Federal and statutes), because of the language of the new law. The new law also required the cover sheet with the specific paragraph about non-discrimination - to appear in red type - on each “governing” document. In California, annual and sales disclosure packages generally contain anywhere from 3 to 10 or more documents. Recorders were refusing to follow the law, seniors advocates were clamoring, and the “red sheets” went up for sale everywhere - what a hassle! So, “clean-up legislation” had to be proposed immediately when the new year rolled around. And it was. (A law to undo parts of a law.)

The other thing that the California Legislature is now famous (or should I say “infamous”) for in the CID “world” is tinkering with assessment collection. Homeowner Associations in this State are at a disadvantage with respect to priorities and ease in collecting through nonjudicial foreclosure. CLAC has been fighting for years to get priority lien protections (“super lien”) as exist in the UCIOA. The closest CLAC got to this gold ring was a statute that provided for two month’s worth of assessments reimbursement by lenders in a bill that made it to the Governor’s desk a few years ago - and was then vetoed. California homeowner associations are behind the eight-ball in collecting assessments because of the micromanagement mentioned above. In 2000, then Assemblywoman Jackie Speier was successful in pushing a law through the Legislature (AB1317) that required homeowner associations to adopt a tedious, time consuming and expensive procedures in pursuing those to homeowners with delinquent assessments, imposing impossible timelines with regard to mailing of recorded liens, etc. This past year, CLAC fought long and hard to prevent an additional bill (described below) that would require boards of directors to meet with delinquent owners within tight timelines that fell between meetings, offer payment plans to delinquent owners, distribute more disclosures, wait longer before filing a lien, etc. The job of a volunteer board member in California is more than a job. It is a time-consuming, difficult, thankless, complicated, and non-compensatory while “fraught-with-liability” job. The costs to all of the association members as well as the delinquent homeowner are going to be increased by virtue of all the statutory requirements, which clearly require professional assistance to achieve compliance, because no layperson can reasonably interpret or understand them. Some legislators would like nothing more than to eliminate the right of an HOA to collect an assessment debt through non-judicial foreclosure, failing to understand that if judicial foreclosure is the only avenue of remedy, the costs of collection to be paid by HOAs and Owners will skyrocket!

New Laws Taking Effect January 1, 2003

For CLAC, The 2001-2002 process consisted of victories and some defeats, and proved that money talks loudly in Sacramento (what a surprise) - but grassroots participation and constituent contact also catches the attention of legislators swept up in the flow of complicated bills. CLAC was immersed for the duration, and never lost sight of the fact that the ultimate consumer in every association is affected (sometimes quite adversely) by technically complicated processes in the law. Of significance, CLAC deserves credit for recently being a guiding force in preventing a law from being enacted that would open up confidential and otherwise executive privileged documents and discussions to the members.

Preventing legislation that would prohibit an Association from exercising otherwise existing rights to collect assessments by all available methods until the debt exceeded $5000. (Earliest version of AB 2289) Encouraging a law that would require reporting general nature of contracts approved between regular meetings.

The 2001-2002 legislative session tested the patience and fortitude of many CLAC Delegates and CLAC’s advocate, Skip Daum. There were few simple bills - of the most significant were 2 very long, complicated and often amended bills proposing changes in the arena of assessment collections and pursuit of construction defects remedies. Additionally, there were 2 other long and complicated, and often amended bills that open the door to accountability, a manager certification bill and homeowner association registration bill. CLAC expects more of the same in the coming years - legislative reaction to constituent pressure, long, complicated and highly detailed legal requirements for operations of HOAs. Seemingly ironic, the CLRC (California Law Revision Commission) has been reviewing the Davis Stirling Common Interest Development Act (Civil Code Section 1350 et seq.) for over two years now, with the stated purpose of simplifying and improving the Act, or replacing it with something more comprehensible - such at the UCIOA (Uniform Common Interest Ownership Act) adopted by many of the other States. However, the momentum of publicized accounts of misuse of power in some associations in the newspaper and on TV has caused the train to pass the engine. The diligent and investigative processes of the CLRC have not deterred California legislators from approving new, even more complicated laws that regulate homeowner associations and those who serve them to be embodied within and outside the Davis Stirling Act.

The New Laws

SB 2032 - Monteith - Flag Flying. Associations may not prevent owners from flying flags on their own property and exclusive use common area. There are some simple rules that may be implemented, but for the most part - an association that does not allow reasonable display of the American flag is headed for disaster. Owners may use flagstaffs or poles (within the areas mentioned). However, flag display protected by this statute does not include red, white and blue flag shaped lights or painted displays. Questions are already brewing about the allowable height of flagpoles in patios and on balconies.

AB 2289 - Kehoe - Assessment Collection. This bill revises and revamps the specific technical procedures required to collect a delinquent assessment account in a homeowners association. As mentioned above, a number of technical procedures were added to the code by AB 1317, a bill introduced by then Assemblymember Jackie Speier. This new law would essentially accomplish the following changes to the law:

Associations are barred from prohibiting access by any owner to his or her separate interest unless the association has a court order. Board members are generally required to meet with delinquent homeowners in executive session, if the delinquent homeowner requests it, within specific timelines as prescribed by statute. Associations are required by law to note any matters that are discussed in executive session in the minutes of the next open board meeting that immediately follows the executive session. Associations are now required to provide a specific full page notice to the members informing them on the new legal requirements and about the possibility of losing their home in foreclosure for unpaid assessments, and about payments, the right to ask for a payment plan, and the right to ask for a meeting with the Board. This new disclosure is in addition to already required disclosures regarding assessment collection practices (aka “the collections policy”). Associations are precluded from recording a lien sooner than 30 days after the “pre-lien” notice currently required by law is sent to the homeowner. (Previously, the Association was able to record a lien as soon as its own policy allowed after the required notice). Penalties attach under this new law for failure to release any lien that was recorded in error within 21 days of realizing it was filed in error. The “person” who recorded the lien is the one responsible for releasing it if recorded in error. The late fees and interest that can be charged are limited to what is provided in the governing documents (where before, the statutory limits of $10 or 10% of the delinquency (for late charges) and 12% per annum (for interest) were the standard). If the association misses any of the technical timelines or requirements in recording or pursuing a lien, it must stop the process, release the lien, and start all over again.

There is more to the bill than the above, and attorneys and courts may interpret some of the requirements differently so associations should seek out knowledgeable professional assistance to meet the technical requirements of the new law. All collection policies in the State will need to be updated to include all of the new requirements.

AB 555 - Dutra and Correa - HOA Manager “Titling” Bill. This bill started out as a manager licensing bill with complete accountability of managers through state agency reporting and rather severe penalties for non-compliance. However, in its introductory form there were a number of problem areas identified by CLAC (more than 25, not the least of which was concern over the ultimate, potentially exhorbitant costs to managers to register and pay for the oversight of themselves). So, it became a certification “titling” bill. Ultimately, as a “stepping stone” into state oversight of homeowner association managers, it was watered down to a form of disclosure relating to common interest development managers. The key is whether HOA managers will be able to call themselves “certified common interest development managers” or not.

In order for any manager who is managing a common interest development to call themselves a “certified common interest development manager,” they are required to pass a certain examination or achieve certification designated by the professional associations in California for common interest development managers. The bill affects the business and professions code (Section 10153.2 and 10170.5), and the Davis-Stirling Common Interest Development Act (Civil Code Sections 1363.5 and 1365).

Specifically, a person who calls himself or herself a “certified common interest development manager” (or similarly intentioned title) without having fulfilled the requirements of the new statutes would be considered to be in violation of the law.

The statute starts out with a number of legislative findings and declarations. Basically, those findings and declarations indicate that there are a large number of Californians who live in common interest developments who depend on professional management for administrative and management services. The findings indicate that individuals who are hired to manage common interest developments are not recognized by laws possessing educational or management skill standards even when they identify themselves as “certified.” In other words, any person can call himself or herself a certified common interest development manager without having received specific training or having specific expertise. The findings indicate that people who reside in common interest developments and serve as volunteer board members need to be assured that the managers who refer to themselves as “certified” have met certain minimum testing and educational requirements.

Business and Professions Code Section 10153.2 is amended to affect real estate brokers and their connection with common interest development management. A real estate broker, in applying to take the examination for a real estate broker license, must also submit evidence, satisfactory to the real estate commissioner, of successful completion at an accredited institution of a number of courses. One of those includes as an elective a three-semester unit course in common interest development. The courses from which the applicant must attest could be chosen from eleven different subjects, one of which, on or after July 1, 2004, includes a topic addressing in the Davis-Stirling Common Interest Development Act beginning at Civil Code Section 1350. In other words, a real estate applicant does not need to have training in common interest developments administration or law to apply to take the real estate license - it is simply one of the electives. The requirements are waived for CPAs providing accounting services only and State Bar of California members.

Likewise for renewal of a real estate license, a license holder must have completed, among other things, at least 18 clock hours of courses or programs related to consumer protection, and designated by the Real Estate Commissioner as having satisfied the purpose in his or her approval of the offering of the coursed or programs, which include, among other things, common interest development practices relating to management, maintenance, and financial matters addressed in the Davis-Stirling Common Interest Development Act. In other words, these are electives, not mandatory requirements, even if the real estate broker manages homeowner associations.

The requirements to meet the test as to whether a manager can be called a “certified common interest development manager” are as follows:

Within the previous five years, the person has to have “ ... “passed a knowledge, skills and aptitude examination or have achieved a certification designation endorsed by a professional association for community association managers and have received instruction in California law pursuant to Paragraph 1B within the last five years.” The course work must have been approved as a continuing education course or equivalent by the Department of Real Estate, and shall include a “competency examination” which is to be developed and administered in the manner “... consistent with standards and requirements set forth by the American Educational Research Association’s ‘standards for educational and psychological testing’ and the Equal Employment Opportunity Commissions ‘Uniformed Guidelines For Employee Selection Procedures,’ the Civil Rights Act of 1991, and the Americans With Disabilities Act of 1990, or the course or courses have been approved as a continuing education course or equivalent course of study pursuant to the regulations of the Real Estate Commissioner.”

Educational curriculum “Shall be no less than a combined 30 hours in course work described in the subdivision.” The examination “Shall test competence in common interest development management in the following areas:

Instruction in California Law that is related to the management of common interest developments, including but not limited to topics covered by the Davis-Stirling Common Interest Development Act.

Personnel issues, including but not limited to general matters related to independent contractor or employee statutes, types of harassment, the Unruh Civil Rights Act, Fair Employment Laws, and the Americans With Disabilities Act.

Risk management as it pertains to common interest developments, including the insurance coverage and preventative maintenance programs.

Property protection, including but not limited to general matter relating to hazardous materials, the vehicle code, local and municipal regulations, family daycare homes, energy conservation, federal communications commission rules and regulations and solar energy systems.

The business affairs of community associations, including but limited to, necessary compliance will all local, state, and federal laws and treatises.

Basic understanding of governing documents, codes, and regulations relating to the activities and affairs of community associations and common interest developments.

Instruction in general management that is related to the managerial and business skills needed for management of a common interest development including, but not limited to:

Finance issues, budget preparation, management, and administration of community association financial affairs, bankruptcy laws, and assessment collection, and other activities. Contract negotiation and administrations. Supervision of common interest development employee and staff. Management of common interest development maintenance programs. Management and administration of rules, regulations, parliamentary procedures, and architectural standards pertaining to CIDs Management and administration of CID recreational programs and facilities. Management and administration of owner and resident communications. Training and strategic planning for the community associations board of directors and committees, and other activities of residence. Risk management as it pertains to CID properties, activities and emergency preparedness. Implementation of community association policies and procedures. Ethics for CID managers. Professional conduct and standards of practice for CID managers. Current issues relating to CIDs.

A “Professional Association for CID Managers” means an organization that meets similar requirements, including the following:

Has at least 200 individual members or certificants who are CID Managers in California. Has been in existence for at least 5 years. Operates pursuant to Section 501(c) of the Internal Revenue Code. Certifies that a CID Manager has met the criteria set forth in Section 11505 of the Government Code. Requires adherence to a Code of Professional Ethics and Standards of Practice for certified CID Managers.

In addition, this new law requires a person who provides services to a CID, as a manager, to disclose to a board of directors the following:

Whether or not the CID Manager is certified as defined in this law. The name, address and telephone number of the professional association that the Certified CID Manager, the date the manager was certified, and the status of the certification. The local of his or her primary office.

This statute says it is an unfair business practice for a CID Manager to call themselves a “Certified CID Manager” without obtaining the level of testing, equivalency, competency, and education required by this new law. Since CAI provides certain designations and CACM (California Association of Community Association Managers) also provides certain designations for levels of competency, there already is confusion as to which managers will already qualify to call themselves “Certified CID Managers” on July 1, 2003, when the designation actually kicks in.

The whole law is to remain in effect until January 1, 2008, unless it is earlier repealed. Although this statute takes effect January 1, 2003, the requirements relating to the Certified CID Manager do not kick in until July 1, 2003, after which one may not hold themselves out to use that title “Certified Common Interest Development Manager” without having met the requirements of the statute. There are other timelines involved. As of July 1, 2004, requirements in education in the subject of California law relating to common interest development would be included in the necessary training for Certified Common Interest Development Managers.

The bill has other requirements that pertain directly to incorporated HOAs in the State. Currently, under California law, a homeowners association in filing or restating, or amending the Articles of Incorporation, after January 1, 1995, must list the managing agents name and address. In addition, beginning January 1, 2003, the biennial (or annual - at present two new laws contain conflicting language) statement filed by homeowner associations satisfying the Department of Corporations required reporting, or changes to the Articles of Incorporation, or filing of Articles of Incorporations, must state whether the association manager is a “Certified Common Interest Development Manager” under this statute.

And prior to this statute, homeowner associations were required to notify the owners, within the sixty day period before the beginning of each fiscal year, of the association’s property and general liability, and directors and officers insurance coverage policies, as well as flood and earthquake insurance policies that were in existence. The disclosure of fidelity insurance coverage was not required prior to this statute, but after it, boards must include in this required annual insurance disclosure that goes to the members the information as to whether the associations funds are protected by a fidelity insurance policy. The particulars that must be given are the name of the insurer, the type of insurance, the policy limits on the insurance, and the amount of deductibles, if any. This is the same for other required policies, and if the insurance has lapsed, cancelled, or not to be immediately renewed, restored or replaced, or if there is a significant change, such as reduction in coverage or limits or an increase in the deductible, the owners have to be notified “immediately” by first-class mail.

AB 643 - Torlaksen - Registration Of Homeowner Associations. This new law requires registration of common interest developments through the Secretary of State, Department of Corporations, via the Articles of Incorporation or the annual (or biennial) statement filed with the Secretary of State.

This registration process requires completion of a separate form, and a payment of a fee not to exceed $30 as prescribed by the Secretary of State. This form will provide the information described below to the Secretary of State.

Under current law, namely Section 1366.2 of the Civil Code, which preceded this new law, associations are “entitled” to record with the local county recorders office a statement that includes:

The name of the association as it is shown in the CC&Rs. The name and address of the managing agent or treasurer of the association or the entity authorized to receive assessments and fees. A daytime telephone number of the authorized party above. A list of separate interest subject to the assessment (lots or units, by parcel number or legal description, or both). The recording information identifying the CC&Rs. If an amended statement is being recorded, the recording information identifying the prior statement. The county recorder is authorized to charge a fee for recording that said document.

Few Associations complied - most likely because if the invasive information being made public and the lack of any requirement language. Voluntary filings like this can lead to liability exposure if the information that is provided is inadequate, incorrect, or becomes outdated. The law was basically just too loose. Under this new law, Civil Code Section 1363.6 is added to the Civil Code and provides:

To assist with the identification of CIDs, each association: “... shall submit to the Secretary of State, on a form and for a fee not to exceed thirty dollars ($30.00) that the Secretary of State shall prescribe, the following information concerning the association and development that it manages:”

A statement that the association has formed to manage a common interest development under the Davis-Stirling Common Interest Development Act. The name of the association as set forth in the Declaration or other governing document. The street address of the association’s on-site office, or if none, the address of the responsible officer or managing agent of the association. The address and either the daytime telephone number or e-mail address of the president of the association, other than the address, telephone number, or e-mail address of the association’s on-site office or managing agent of the association. The name, street address, and daytime telephone number of the associations managing agent, if any. The county, and if in an incorporated area, the city in which development is physically located. If physically located in more than one county, each of the counties must be named. If the development is in an unincorporated area, the city in closet proximity to the development. The 9-digit zip code, front street, and nearest cross street of the physical location of the development. The type of common interest development, as defined in Civil Code Section 1351(c), managed by the association. The number of separate interests (units or lots) in the development.

The association has to submit this information as follows:

By incorporated associations, within ninety (90) days after filing of its original Articles of Incorporation, and thereafter at the time the association files it biennial statement of principal business activity with the Secretary State. By unincorporated associations, in July of 2003, and in that same month biennially thereafter. Upon changing a status to a corporation, the association must comply with the deadlines for incorporated associations.

The association must notify the Secretary of State of any change in street address of the association’s on-site office or of the responsible officer or managing agent of the association in the form and for the fee prescribed by the Secretary of State, within sixty (60) days of the change.

On and after January 1, 2006, the penalty for an incorporated association’s non-compliance with the initial or biennial filing requirements of the section shall be suspension of the association’s rights, privileges and powers of the corporation and monetary penalties, “... to the same extent and in the same manner as suspension and monetary penalties imposed pursuant to Section 8810 of the Corporations Code.” (In other words, the same as existed previously for filing of the “Statement By Domestic Stock Corporation).

The Secretary of State shall protect the information relating to the President’s name and address, and telephone number and e-mail address, but the other information is not protected. In other words, Secretary of State may not make that protected information available to anyone other than “ ... Members of the Legislature and the Business, Transportation and Housing Agency, upon written request.” All other information submitted pursuant to this section shall be subject to public inspection.

As for disclosure to new owners, Civil Code Section 1368 (which sets forth the seller disclosures required upon sale of the property) is amended to include “A copy of the associations Articles of Incorporation, or if not incorporated, a statement in writing from an authorized representative of the association that the association is not incorporated.”

SB 800 - DUTRA - Construction Defect Claims. California has, in more than a year now, been dealing with a very difficult case decision (Aas case). A portion of the holding in that case precluded Associations from recovering damages or holding a builder responsible for defects like missing firewalls and shearwalls until a failure caused losses. On the other hand CLAC had been, for years, fighting continuing proposals for legislation that would make it harder for Associations to collect for or get remedy for defective construction. At the end of the legislative session in 2002, some of the legislators pulled all loose ends together with this new bill (which is law now). The bill combines a remedy for serious building deficiencies that could cause harm to life and limb with compromise on the definition of defects that excludes some previously accountable errors. It addresses some changes to a mediative process often referred to as “the Calderon process” (named after a legislator that introduced Civil Code Section 1375 two years ago) that was amended a year ago to considerably to tighten up processes and bring in important parties like subcontractors and insurance providers.

CONCLUSION

You can imagine what it is like these days in an opening discussion with a new client that has not had the benefit of properly trained management or a CID Attorney. It often goes something like the below (for example, in conjunction with discovery that a major rehabilitation effort is needed for which there are no funds available). Understand that one would be talking to a volunteer board of directors, and assume that imposing an emergency assessment as allowed by Civil Code Section 1366(b) is complicated by the fact that the Association has been using a handyman to “fix” problems the last few years (like holes in the walkways, stairs and decks, all indications of a much larger problem) to save money, and the problems should have been discovered earlier.

“Well, you need money for this project, a lot of it. However, you have some pretty serious problems to overcome first. You cannot increase assessments, even within the legal limits, because you have not complied with Civil Code Section 1366 requirements for sending out budget and reserve study information last year (or any prior year for that matter) in the 15 day annual window period allowed by law. You cannot impose a special assessment for the same reasons. You could have trouble imposing an emergency assessment because your records indicate that you should have known about these serious problems more than 3 years ago, which may have allowed you to budget for them. You are lacking the benefit of a good reserve study that includes a physical inspection of the components, which according to legal requirements must be done every three years and reviewed every year. A bank loan would help but you will have trouble getting one because the banks realize that the laws are complicated most will not loan money to an association that lacks professional management and a good HOA attorney on call. If you take the assessment and construction plan to the membership for a vote you need to make sure that all voting complies with the many technical legal requirements for meetings and meeting notices, and those can be complicated by conflicting timelines and provisions set forth in your governing documents as well as Civil and Corporate Codes. If you decide to vote by written mail ballot, you need to comply with the technical disclosure requirements set forth in the Corporations Code Section on written ballots even if it is different than what your governing documents say. (‘What are governing documents you ask?’ The “governing documents as legally defined include the Articles of Incorporation, the Bylaws, the CC&Rs, and Rules and Regulations of the Association. [As their eyes start to glaze over .....) If you impose an emergency assessment because of safety concerns, which you are allowed to do, you still have to send out notice of the assessment, and then try to collect it from the owners who will have a very hard time coming up with such a sizable amount. You can expect political problems and will need to know the laws regulating association meetings, homeowner forum and all that, and what can be discussed in executive session and what must be discussed in open session, and which of the meetings require homeowner notice. You will run into time and technical problems collecting unless the detailed requirements of the statutes relating to assessment collection are followed precisely. A mistake on a lien detected anytime after it is recorded requires release of the lien and “start over” of the collection process because the statute requires it. If any owner wants to discuss a payment plan the Board has to meet with the owner who requests a meeting, within a specified number of days after receiving the request .... blah blah blah blah (that’s all they hear after that). Common questions at that point, often asked in an exasperated tone, usually coming at the first perceived break (when the attorney stops to take a breath or determine if he or she forgot anything): "Can't we just let the State take over and run the Association? We can never raise enough money to pay for the work, let alone enough to pay for management or attorney's fees." OR THEY ASK "What happens if we just resign, sell our homes and leave."

The complicated legal processes in California dictate that many self-managed Associations are doomed. Professional management will move further out of reach for many as management companies pass on the cost of “title-ing” (educating and certifying) managers and of course attorneys’ fees rise as legal help is needed to resolve disputes over technicalities. Affordable living is could be a thing of the past because guess who pays the price for all of this? You’ve got it - the consumers living in the CIDs, even though the original legislation was touted as "consumer protection".

copyright 2003, Beth Grimm