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  • Frank Rizzi manages Bos Commercial in West Covina and has been in real estate since 1988. Since then, he has made millions for his investors over the last decade.

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More on Flowers – and Exclusive Use Areas

Here is a continuing dialogue on planting flowers in the common area:

A reader responds to me- “BUT, if the board allows homeowners to plant flowers outside their units and requires them to maintain their area then what happens when the property is sold and the new owner refuses… because….after all, he/she didn’t plant those flowers?”

My answer: Use of a recorded agreement could solve this.

Another question: “Also, I would think that the board would have to carefully define what maintenance is required. In order to plant flowers, it requires good soil, plenty of water and fertilizer and possibly insecticide. Not to mention periodic pruning, depending on what kind of plants or flowers are planted.”

My answer: I could not have said it better. The requirements and expectations should be outlined – when expectations are carefully defined, everyone fares better. Differences of opinion are more easily resolved.

Reader, perplexed: “I still don’t understand what exclusive use of the common area really means or what it encompasses.”

The answer in each case “depends” on a lot of things that should be considered. Its not the same in every assn. And in many, its not defined well. To fully vet the answer, an attorney would need to review the governing docs for the association, Civil Code Section 1351 definitions, and would need to understand the type of development and how the buildings, common area, and everything is situated to answer the question as to that particular association. The attorney would need to know whether the Board is inclined to or would like to allow individual planting areas and the like. The attorney would now have to factor in the limitations set forth in Civil Code Section 1363.07 relating to transfer of common area for exclusive use (a new law as of last year) to fully answer the question.

Board Member Liability Protection – How to Optimize It

These days, it’s getting tougher and tougher to recruit good board members in common interest developments. One has to ask what makes people serve when board members all over the state of California face thankless service, undeserved criticism, false assumptions, low (actually no) pay, sometimes long hours, the need to solve often complicated and difficult decisions, bad press and threats of being sued by every disgruntled homeowner. Board member liability is a big issue. So what protection is there?

Civil Code Section 1365.7 provides some protection for “volunteer” board members (those who are not working for the developer and who own only one or two units and not more)in residential CIDs (common interest developments). The condition is that an association must carry policies of insurance providing coverage for general liability and individual liability of officers and directors of the association for negligent acts or omissions with the minimum amounts of coverage of $500,000 if 100 or fewer separate interests and $1,000,000 if more than 100 separate interests. The statute wording means essentially that a board member cannot be sued personally for amounts up to the Association’s coverage but there are other conditions as well. And an Association that sticks to the statutory limits is probably not giving adequate protection for board members because in today’s world, these coverages are considered on the low side.

There are other requirements of course. The protection is not intended for rogue directors. The actions of the board member (1) must be performed within the scope of the director’s or officer’s association duties, (2) must be performed in good faith, and (3) must not be wanton, willful, or grossly negligent.

Good faith is determined by motive and intent. Most board members are well-intentioned (in spite of what you read in the newspapers). Sometimes that is hard to determine for sure, but it is easy to claim innocence, so a lack of good faith would have to be fairly obvious. The scope of duties could be generally defined but there are situations where the lines blur. For example, what if a board member is out walking the neighborhood looking for rules violations and confronts an owner about the car parked on the lawn, and thereafter the confrontation elevates to a fist fight. What if a board member causes a contractor to leave the site by trying to micromanage the work, after the board member has been warned by the other Board members and the association’s attorney that they are not to interfere with or have contact with the contractor. What if a Board member is sued for defamation for bad-mouthing a contractor? What if the Board member misspends association funds (like the one who bought himself an expensive airplane ticket to return early from visiting his father to attend a controversial association meeting). Are these examples performance of the duties or acting within the scope of what would be expected of a board member? Willful and wanton behavior is an act that is intended to or likely to cause distress or harm of some kind. Gross negligence is a lot worse than ordinary negligence. Making a mistake such as poor budgeting is usually ordinary negligence, but making a mistake involving conduct that one knows is wrong, is against the law, or is ill advised crosses the line. These points can be argued by lawyers. The best protection comes from acting reasonably.

There is also protection in the Corporations Code (7231 and 7231.5) in statute commonly known as the “safe harbor” statutes. If a board member acts in a manner he or she believes is in the best interests of the (in an incorporated) Association and with reasonable inquiry or reliance on information, opinions, reports, statements, or other data, financial or otherwise, prepared by officers or employees believed to be reliable and competent in the matters presented, or by independent counsel, accountants or other persons qualified to give opinions, the board member cannot be sued for the action. Again, “good faith” plays a large part in things.

Associations should also carry directors’ and officers’ liability insurance that protects the Association and Board members from liability (including payment of damages and/or defense costs of any lawsuit). Most governing documents include a requirement to carry this insurance, but many do not specify a minimum, so the statute mentioned above becomes the guide. However industry standards suggest more coverage than the statute dictates. If the association documents do not provide the authority for insurance coverage then I would have to suggest a document amendment. It is critical to provide protection for those willing to do service.

Many board members are covered by individual homeowner’s insurance policies purchased to provide protection on their individual units. Many homeowners’ policies include some coverage for service on nonprofit boards. This is something a board member might want to explore.

And most governing documents provide indemnification protection for board members that says board members are entitled to a defense of a lawsuit against them or payment for damages they might be adjudged for actions taken on behalf of the Association. The Corporations Code provides authority for corporations to “indemnify” any person threatened with a lawsuit for specific causes of action related to corporate service, or action brought by the Attorney General, and to pay judgments, fines, etc. (Corporations Code Section 7237)

One area where board members can lose some of these protections is by accepting compensation for services as a board member. The statutes only protect uncompensated (volunteer) board members. The Association’s insurance policy may have limitations too – it is wise to check this if there is any compensation. Some Associations provide assessment waivers for board members (although not a commonly recommended practice) and it is important to understand that if a board member receives an assessment waiver in any proportion or amount, that could be considered compensation for purposes of analyzing liability protections.

So – there are some common protections and thank goodness for this. Most board members deserve protection from lawsuits and judgments that are a result of acting on behalf of the Association. But it is important to remember that the protections come through good faith actions, keeping within the normal scope of a board member’s duties, not accepting compensation, and consulting with the right kind of experts or seeking information from the right (reliable and informed) sources. It is important to optimize the protections, so that Board members can stop losing sleep at night everytime a disgruntled owner threatens to sue. Unforetunatetly, it seems to be a common practice here in our state to threaten a lawsuit before asking how things might be resolved.

May an Association Prohibit Home Businesses in HOAs?

I get a lot of questions from visitors to the website who want to know if an HOA Board can prohibit an owner from having a home business. Many people telecommute today and its that kind of society. Many work out of their homes with their own businesses. Many HOA documents prohibit commercial activity in an HOA. When I write documents for California HOAs (I should say here that I only write for mature associations or those that want to convert to Plain English documents) I write provisions that prohibit commercial activities or any business that has outward visible signs. Sometimes I define various examples, depending on how specific a Board wants to get. I do this because I do not believe it behooves an association to spend any energy in the form of money or physical energy on trying to determine if someone is working out of their home. If they are, and it is obvious, then there are “outward visible signs” and the violation can be addressed.

As for other attorneys and Boards – many attempt to enforce commercial prohibitions even when there are no outward visible signs and some are successful. Some fail miserably and end up in a “war”. Sometimes, the claim or complaint about a home business or commercial activity comes from someone on the board or a neighbor who is “disgruntled” and upset wiith the person being charged or whose “secret” at home work has been revealed.

On the other hand, some residents “push the envelope” and expect their neighbors to accept activities that are associated with doing business, believing the Association has no power to control what they can do in their homes or about their property. That is not the case. When the goverrning documents prohibit commercial activities, take them seriously. But if you keep the activities within your home, and do not flaunt what you are doing, there should not be a problem.

How Far Back Can An Association Go To Collect Assessments?

Here is a question I received about assessments:

“My condo association is threatening to come after me for assessments dating back 3 years. I left 3 years ago. The lender still has not done anything. Can they come after me?

The answer would be yes, if they are entitled to the assessments. The HOA or Condo Association can go back 4 years. Beyond that it would run into a statute of limitations problem (in California) as the SOL on contract breaches is 4 years, and the CC&Rs are considered a contract.

EARTHQUAKE INSURANCE

Many community associations have been inquiring whether they should buy earthquake insurance, considering that the costs have become exorbitant. It is my opinion that associations should purchase earthquake insurance if they can get it, even if the price is high. The reason: Associations that DID NOT have coverage experienced severely exacerbated problems. Translated into English – the Associations that did not have coverage had a much harder time recovering. Many still have not recovered – and it is years later. The homeowners who wish to rebuild and keep their homes are the biggest losers when there is no insurance and the special assessment to rebuild is out of reach of the average person.

I have been asked since to speak to many associations about the considerations behind the decision to buy or not to buy – and have shared the floor with insurance representatives that are able to find earthquake insurance, some even with a 10 percent deductible, a “per building” deductible (which is more desirable than a “per development” deductible) for a sum of money that is sufficiently affordable. By the way, my rule of thumb in 1996-2001 was that I considered an affordable master policy to be somewhere in the range of $400.00 – $600.00 per year per unit for homes priced in the neighborhood of $200,000.00. With rising insurance costs since then, I would consider protection in a consideralbly higher range per home to be affordable and worthwhile.

Many boards, when they face the increases coming through for earthquake insurance and the cuts in coverage, immediately react with negativity, and their objectivity is lost, because it just seems unfair. Maybe it is unfair – life is not always fair. But it is extremely important to consider the risks involved in saying “NO”.

Those risks are:

·If there is an earthquake, the board members and association could be sued and the directors and officers liability carrier may deny coverage for “failure to adequately insure”.

This “failure” is an excluded item on most directors and officers liability coverage policies. Even though there does not seem to be a binding precedent yet – many of the insurance companies are publicly claiming that they could assert this exclusion as a basis to deny a claim if an association or board was sued for failure to purchase earthquake insurance.

·If the association has no coverage, and there is an earthquake, only those owners with substantial equity in their property will be inclined to stay and weather the special assessments needed to reconstruct.

In many cases, we could easily be talking about the difference in a $7,000.00-$15,000.00 assessment in an association that has master earthquake coverage as opposed to a $100,000.00-$150,000.00 assessment in an association that does not (based on discussion about homes that average $250,000.00 to $450,000.00 in cost, perhaps a scarcity today).

·”Stand alone” coverage which is purportedly being offered for individual homeowners whose associations are uninsured is not a very practical solution, considering how difficult it would be to rebuild one single unit in a four, five or six unit building. (Besides, reportedly, the quotes given to owners are astronomical, and some policies sold purportedly as “stand-alone” products will only pay if there is underlying coverage.)

If your CC&Rs require that the board purchase earthquake insurance coverage, then it is my opinion that it must be purchased unless the CC&Rs are amended. If it is not, then there is a problem by virtue of ignoring the governing documents and they should be amended.

For any association that is having difficulty getting earthquake insurance or that is having difficulty justifying the cost and is considering just saying “NO”, the following [minimal] steps should be taken in order to enable the board to claim the decision was a “prudent business decision” and protect the Association.

The board of directors should investigate as follows:

·Obtain risk analysis for type of development and geological location.
·Procure multiple bids from insurance companies for earthquake insurance, or from insurance broker who has access to several different companies.
·Survey homeowners to see where they stand on the issue (providing them with meaningful facts and information the board has gathered).
·Determine whether the costs involved would require homeowner approval (if they are in excess of legal limits for increases in regular assessments or imposing a special assessment).
·Make a prudent decision after gathering and considering the information as described above.

If the association wants to purchase earthquake insurance and the costs exceed legal limits for increases, then the association must go to the membership to get approval of a majority of a quorum of the homeowners for the special assessment or the increase in regular assessments to cover the insurance costs under Civil Code Section 1366 (the governing documents may require majority approval for the purchase – be sure to get legal advice on this). For those associations waiting for a state program to bail you out, you can stop waiting. The California Earthquake Authority, and any other state program selling residential insurance policies, will not provide coverage for associations because associations must purchase commercial insurance. Community associations are considered a business by the insurance world. Owners can purchase coverage there on an individual basis, but there are no master association policies available.

Some associations are considering using the money that would otherwise be used to purchase earthquake insurance for retrofitting. If your buildings could benefit greatly from retrofitting, this might be an option. However, the above considerations still apply. Perhaps if an association must pay exorbitant amounts for layers of insurance to get full protection, there might be a feasible way to combine the purchase of minimal coverage with additional monies being spent on retrofitting.

It is best to consult with your legal counsel and seriously discuss the legal ramifications, and consult with a knowledgeable insurance agent to discuss the options available, before turning your back on the question involving the purchase of earthquake insurance.

What To Put Up On the Web – Associations, Be Careful!

Recently, a manager I work with on many associations asked me: “Do you suggest password protecting the proprietary info: i.e. governing documents, minutes newsletter,etc. Some of my boards have it all open and others restrict the newsletters, minutes, etc. Thoughts?”

This is my answer to that question. Things like governing documents that are recorded with the state (CC&Rs and Articles of Incorporation in California) are already in the public domain and so I do not have a problem with not protecting them. Even publishing the Bylaws is probably not a problem because they tend to be pretty standard, except in cases where they were drafted by a board member or someone who did not know what they were doing, because in that case, publishing them for the world to see might create quite a sorry impression of the Association’s professionalism.

But as to other documents of the Association, it is my view that minutes, newsletters and financial papers, etc. that are not already in the public domain should be protected, and use of a password is helpful. The public is not entitled to know the private business of an association.

If there are known construction defects am I required to disclose them to a prospective purchaser?

Yes. The seller of a unit, or lot, is required by law to disclose all material defects in the property, including defects in the common areas, and defects in other units or lots if they affect the unit or lot being sold. The disclosure requirements extend to all defects of which the seller is aware, or should be aware. Additional disclosure requirements apply when construction defect litigation has been commenced, or being considered. Any real estate agent involved in the sale is also required to disclose any defects of which he/she is aware or should be aware, and is further required to conduct a reasonably competent and diligent visual inspection. HOAs, on the other hand, are not required to provide or disclose construction defect information to prospective purchasers of units or lots.