California Condo & HOA Law

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November 18, 2005

SB 61 - Making it Work for Elections in HOAs

Thanks to the numerous comments and suggestions I received relating to SB 61 - California legislation directing specific processes for certain HOA elections - I can offer what I hope is some guidance and insight. Remember that the statute does not become operative until July 1, 2006, so HOAs with elections before that date need not heed the changes. However, attorneys like myself that try to be forward thinking and are in the processes of amending documents, writing articles, and posting helpful information need to sort out the requirements now, and conform our writings to systems that will satisfy the law after that point. Although the author of this bill seems willing to entertain some cleanup measures to eliminate some of the confusion about the combined processes (public voting system and corporate voting system), the basics will not likely change. All if not most HOAs will have to incorporate the double envelope voting system (geared toward absentee voting and voting at polling places) with the corporate system (use of proxies and cumulative voting when the governing documents allow for these things). Why I say some but not all is because the process does not make sense in Associations that are very small and do not need the added expense. These associations can certainly use the secret ballot system at a meeting without having to do the recruiting for board members months prior to the election. A request will be made that smaller associations be excluded from the requirements so long as they adopt a system that allows for secret ballots.

I received many comments stating that the proxy systems and cumulative voting processes are a very important part of the processes for many associations. Minority interests are not served very well without cumulative voting. On the other hand, it tends to complicate the process of elections (and is not allowed in the public voting processes) and most practitioners for that reason advise eliminating it as the Association matures and the documents are amended to be more useful and user friendly.

I have spoken with some association representatives and practictoners who use a combined voting system already. They send each owner a package containing these things

(1) a ballot with choices that also explains how to note votes if there is cumulative voting allowed (which would only be appropriate if the governing documents allow for it), but which does not require nor encourage a signature;

(2) a No. 9 or 10 size envelope with a control number or code, but no name, address or information identifying a particular property, to be used for insertion and sealing of the ballot;

(3) a slightly larger envelope (perhaps 6x9 or so) that has the address for return of the ballot on the front and a printed proxy on the back of it providing general language of a proxy, but no specified choices. This form contains a blank for assigning someone's name to the proxy but says that if there is no name, the proxy is assigned to the Board (or some say Secretary or President of the Association) and the other smaller envelope would be put into this envelope with the proxy on it, the owner would seal the envelope and sign and date the proxy. The proxy would state that it will be counted toward the quorum for the meeting or the balloting process (the election at hand);

(4) The meeting notice if there is a membership meeting scheduled, instructions on using the ballot process, and instructions indicating, if the case, that the ballot must be received before the meeting date or, as some allow, it can be brought to the meeting and dropped in a ballot box or turned in. Owners should be told in this case that if they attend the meeting, they can ask to have the package back, or leave it to be voted as is, when they check in.

This process requires active solicitation of candidates ahead of time, a write in blank or two or more in the ballot (depending on the # of vacant positions), and an announcement ahead of time as to whether owners can send give proxies to others to take to the meeting and get the owners package back. Normally, a later proxy controls. However, if the Association plans to "close the polls" prior to check in at the meeting, this process would not allow for proxies to be brought to the meeting and used to get back the written mailed ballots.

This process seems a very good one to me. It leaves open the question as to whether someone has a legal right to nominate themselves from the floor if the documents allow it. And some of the comments I received from Associations (smaller ones especially) is that they cannot get anyone to submit their name for candidacy prior to the meeting; lamenting that they need to "recruit" from attendees to even fill the positions. I can believe this, and for this type of situation, the mailed double envelope system seems quite excessive and futile.

Stay tuned for more on cleanup that may be requested, but for now, just note that the suggestion that proxy voting and cumulative voting should be eliminated is not the popular view according to comments I received.
(And thanks for those comments!)

Posted by Beth Grimm at 11:14 AM

November 8, 2005

Contract Termination Clauses - How Important Are They?

I am reminded today of the laxity with which many Associations treat contracts. I was reviewing one Association's communication to owners about a half million dollar assessment for rehabilitation work (about $10,000 per unit) and came across the statement "We were able to get a favorable contract with a no-penalty termination clause." The reason I was brought in was to write a ballot measure for the special assessment but of course the curious sort that I am lead to some questions. My first question: "So you already signed a contract before the assessment was approved to pay for it?" (Answer: "Yes" but we can pull out anytime if we run out of money.) Now I know that there is no one on the board with business acumin, and I know in this case the manager of the Association would not give legal advice to the Board about the contract, and I know no one asked me as the Association attorney to review the contract, so I wonder if the contract really says there is "no penalty" for terminating it (when all the work seems to be integrated and terminating the contract prematurely would have to cause a disruption in the work of some kind) or if the Board really just does not understand what the termination provisions require (especially if they are based on proving a breach of contract).

Then there is the employer-employee situation: the Board President calls me and says the Board has fired the on-site manager and told her not to come back to work, and has changed the locks. They want to know if that is ok. I ask: "Is there a contract with this employee, or any promises recorded anywhere, or were any promises made?" The President has no idea about any of this. She is newly on the Board and hell-bent on "cleaning things up."

And last, but not least, there is the Board President who calls and says that they are having a problem with their manager. They gave written notice of termination and the manager came back with a letter saying that under the termination clause of the contract the Board is committed to the contract terms until next August. This is 10 months away. I asked why the Board did not consult the contract before issuing a 60 day termination letter. The answer: we did not have a copy of the contract. When I asked why the Board did not ask the manager for a copy, since the managing agent had all the Association records, the Board President said the Board did not want to "alert" the manager that the Board was looking for a new manager. Well, since the contract termination clauses require the Board to "alert" the manager of any perceived breach of contract and give the company 30 days to cure, this excuse did not carry much weight and would likely fail in court.

So how does one avoid these potentially serious dilemmas? There are many ways but the top of the list is to have someone who can read and interpret contracts (like a lawyer, duh!) tell you what the contract says and perhaps most importantly: how you terminate it if you are not satisfied with what is being provided!

Other ways to avoid potential mishaps like the above:

Do not accept a contract that requires that you show "cause" or "breach" to terminate, especially with regard to management or important ongoing services. Beware of contracts that automatically rollover if "not terminated within [a certain number of days] prior to (or before) the expiration date. In these contracts, if you miss the opportunity to give notice of termination within a particular period of time (sometimes a very limited period each year), you can be committed for another period of time (usually a whole year, but sometimes less or more). Demand a clause in the contract that allows for 60 or less days notice of termination, without cause! An automatic rollover is not bad if there is a way to terminate the contract within 30 or 60 days if you are unhappy with the services. And please keep in mind that when you are handed a contract by a vendor, it is likely the contract is favorable to the vendor, not you, and the terms are negotiable. Of course, you may not be able to get what you want and then the question becomes: "Do I go elsewhere? ... Or settle for what I can get." I know that with regard to management contracts, there are many managers and companies that will accept a 60 day termination clause, without cause. I believe the CACM (California Association of Community Association Managers) model contract allows for reasonable termination without cause.

If you are looking at a contract for construction services, especially extensive and costly services, look for a termination clause that is based on some reasonable measure, such as phases or buildings or a measure of fencing, etc. ("at the end of each [phase, area of fencing, or building]". A contractor who has any savvy at all (which can be an indication of professionalism in the way you are treated) should offer some reasonable termination provisions. In fact, California contracting laws prevent contractors from collecting "up front" the entire amount of the contract as a measure of protecting the consumer who might be duped into giving a flakey contractor a fistfull of money only to see the dust fly as the truck drives away off into the distance (never to be seen again).

Having to show cause or breach to get out of a contract or suffer extensive losses before you can "jump ship" is not beneficial to you. And forcing parties to continue to work together when the relationship has "gone south" can be very painful and unproductive. Having to "buy out" a contract term can be very expensive. Firing someone or some company and hiring another while still under contract with the first creates two contract disputes to deal with. Don't make these mistakes. Treat contracts with care and respect. And understand the legal ramifications. In the eyes of the law, you cannot ignore contractual obligations and requirements.

Posted by Beth Grimm at 1:33 PM

November 2, 2005

HOA Disclosures and Budgets

Here is a common question coming from website visitors in the last two weeks ("budget time") being the trigger I assume.

"We are ready to send out our association budget for voting; what other items must be sent out and can you refer me to someplace I can get them without having to pay?"

Whoa just a minute. [In California] ... The Board should not be submitting the budget for a vote of the members UNLESS the governing documents require member approval. The Board is responsible to determine the budget, and the assessments are that are needed to meet the budget. There is no point in seeking owner approval unless there is a proposal to raise the regular assessments or impose a special assessment that exceed the legal limits of Civil Code Section 1366. And even then, if the amount of assessment triggers the need for owner approval, take care to determine what percentage is required. Read the statute (and try to understand it) - it has a lower percentage than what some governing documents require for approval of certain assessments.

I suggest that you do not create unnecessary stress during this time of the year. If there is no owner approval requirement, don't offer it up as a choice, because if the owners vote it down, what do you plan to do then? Board members can be sued for collecting insufficient funds to meet the needs of the Association. Individual owners cannot (under most circumstances), so who should decide?

That issue aside, you can access (for California requirements) most if not all of the forms required to be sent on the first page of the condoguru website, but you probably already know this if you came from that direction. If on the other hand you came to this blog through communityassociations.net (which is a very good resource by the way), check out the californiacondoguru website for yourself. You will find a TON of helpful information including an annual checklist for disclosures and most of the forms needed. Remember, the distribution timeframe for 2005 was extended to the "not less than 30 nor more than 90 days prior to the beginning of the fiscal year." The 15 day window period of the past is gone (but not forgotten!).

Posted by Beth Grimm at 2:41 PM

What to Do When The Board Ignores the Law or Documents

A reader sent me this question: "I would like to know what recourse the members of a HOA have when they know their Board is operating outside of the California Civil Code requirements and not adhering to the HOA'S CC&R's."

This sounds like a reader who has some knowledge about the laws and governing documents. I hope it is. Sometimes homeowners assume that the Board is doing something illegal, because it is doing something that feels or "tastes" or "smells" illegal, but it actually is not. Education is the key here. And remember, I speak with a California hat on, but some of these tactics might work in other states too.

Assuming the Board is violating (or more often ignoring) the law or what is in the governing documents. I suggest starting with a letter.
The written word becomes a record that is hard to ignore. Speaking out at a meeting does not have the lasting impact of putting a pen to paper (or should I say in this day and age whipping off an email). Do not expect the board to have available all the resources you have drummed up. Refer them to a specific site (giving the entire url address is recommended if an email, or a copy of the resource if you are of the pen and paper crowd). Specify the action you believe is in violation of the law or document provision, and specify the law or document provision itself.

Ask for an Answer, and wait for an answer. No answer? (Wait a reasonable time please, at least until the next board meeting is over.) ...

Step 2. If the gripe is about something for which damages can be quantified (such as increasing the assessments without providing a budget to the members in a timely fashion), write another letter, outline the damages in it and tell the Board you are considering seeking damages in small claims court. Still no answer ...

Step 3. Choices: Consult an attorney (knowledgeable in this area of the law is key), ask for a meeting with the Board under statutorily required practices such as that found at Civil Code Section 1363.810 (which you can look up on the state website by navigating to California laws) or file a small claim and take the Association to court. At this point Boards usually will start a dialogue if one was not commenced before this point. Its a cheap way to exert rights.

If you decided to consult an attorney, and the attorney finds your issues viable, you could have her or him write the letter to the board about following the law. And there is still the small claims venue available for less than $50 for filing and service fees.

What if the "wrong" does not have identifiable or quantifiable damages attached. Make sure the letter of demand is sent to start a record. Consult an attorney. Or bide your time and at the next election, point out [FACTUAL ONLY]issues to others when seeking their vote. Of course, if you don't want to run for the Board, look for someone to support who is concerned about the issues.

Yelling at a Board at every board meeting or disrupting business does little for your reputation, or to help resolve the situation for that matter, and if you happen to be wrong about your complaint, you may end up with egg on your face.

If eggregious conduct continues, it will probably take an attorney to help make the appropriate threats to get the attention of the board.

However, laws that take effect in 2006 relating to assessment collection, records inspection and election challenges allow for resolution in small claims court and allow the judge or referree to make orders that can involve recovery of attorneys fees spent and fines of up to $500 per occurrence. So the doors of small claims courts are opening up to more disputes. The maximim claim for individuals has increased to $7500 I believe, and the small claims courts are required to offer advisory services.

Hope this helps all of you out there who have a complaint about improper practices. Be sure to educate yourself though, before making assumptions about what constitutes a violation of the law or documents. Accusing someone of "acting illegally" without a factual basis can lead to a defamation claim.

Posted by Beth Grimm at 11:23 AM

SB 61 - Association Elections - Can it Be Fixed?

If you do not know it, SB 61 was signed into law on October 4 and will become the law of the land (California land anyway) next July. I have identified some problems with it in trying to explain it to Boards, homeowners and others. The question that keeps coming up - at least with regard to election of directors - what does it do to proxy and cumulative voting, and what about quorum requirements? Right now, as I see it, it does not override either, it just complicates them. I have been speaking with a representative of the author's office about the difficulty I am having explaining how it might work within a system that also allows for proxies and cumulative voting, and nominations from the floor in Association elections. The real question is how much explanation of the two systems needs to be addressed at the time the Board sends notice to Owners of an upcoming annual meeting and election (for directors). It obviously needs to include the ballot and double envelope system that allows for secret voting from your home, or hand carrying the ballot to the meeting. Does it need to also explain that you may use a proxy instead? Most Boards have been sending out proxies with the meeting notice for years because that was the way many people exercised their right to vote (through a proxy holder) and that was the only way to reasonably expect and achieve a quorum. If a Board refrains from sending out proxies, does that mean they can refuse to count them if an owner brings some to the meeting. Not as currently written. Does it mean that no one can cumulate their votes at a meeting. Not as currently written. So the dilemma for the Board is how much to explain in the meeting notice - that owners can vote through the "absentee" system or bring the ballot to the meeting, or that they can give a proxy to another to take to the meeting, or that someone may want to cumulate their votes and if that happens, that the owner may be at a disadvantage if he or she sends in the absentee ballot and then others that attend the meeting are able to cumulate their votes? Or does the Association try to conduct an election via cumulative voting through the absentee voting system. That is the dilemma. Does this newly proposed system, that is really intended to simplify association elections and guarantee secrecy work within the corporate voting process, allowing for cumulative voting, proxy gathering, and quorum requirements?

I think the answer is that it creates more problems than it resolves, unless proxy use and cumulative voting are eliminated. So that idea has been floated and I would like feedback from readers. What if the author of the bill cleaned it up to override provisions in governing documents that allowed for cumulative voting and proxy use in elections that are subject to the secret voting requirements (board member elections, special assessments, governing document amendments and transfer of common area for exclusive use).

I think that all I have said about the complicated nature of elections under the bill (as it resides within the corporate structure) would be simplified if the bill stated that the absentee ballot system (which by the way also allows for ballots to be taken to the meeting or given to another to be taken to a meeting and filled out there) controls and overrides use of proxies and cumulative voting. Now I know that there are opinions on these subjects and I would like to hear them. Is simpler better? Should the new law be amended to eliminate proxy voting and cumulative voting for these specific elections? Should the bill be amended to eliminate quorum requirements for the election of directors? (The public system has no quorum requirements and this system was structured with it in mind.)

I would like to hear from you, either with comments through the blog or emails through my condoguru website. My goal - to get to a place where I can help associations set up a proper election where no one will be at a disadvantage by using one system or another, and to get the cleanup necessary with this new law to eliminate the probable complications, and simplify the job of election inspectors. If their role is based on determining eligibility to vote and vote counting and matters related to that, and not resolving complicated legal issues and the heirarchy between the Corporations Code, the Davis Stirling Act, and the Rules of the Association, boards can go within the development and appoint unbiased association members to do the job, without having to pay an outsider with legal expertise.

I would like to hear from you.

Posted by Beth Grimm at 10:55 AM

November 1, 2005

Smoking, Noise, Nuisances - What Can You Do?

You have just bought your first home after apartment living for years. You are proud, relieved, and excited. Then it begins.

The neighbors have 3 kids and a dog who do nothing less than scurry around the unit all day, clickety clacking on the tile floors, slamming doors, and shouting or barking for joy. (They say a small child makes more floor noise than a 300 pound adult).

Or

The neighbor's smoke is intolerable. It invades your space and makes your life unbearable.

Or

The young newly married couple living upstairs has too much fun in the bedroom and you can't get a good night's sleep.

And you feel trapped. It's not like you can just move away. So what do you do?

Here are my suggestions:

1. Try self help measures first, like talking to the neighbor and asking for some neighborly cooperation, or try earplugs, "white" noise alternatives, air freshening devices, meditation, whatever may help.

2. If the racket or nuisance is ongoing, check the Association's governing documents to see if there is a prohibition on nuisances - usually there is something useful there. Write to the board and ask that the nuisance be addressed. But note that you as an owner have a right to enforce the governing documents. Do not expect miracles. The Board may consider whether it believes there actually is a violation of the governing documents and if so, take measures to address it. If the Board finds a nuisance, it may do whatever is authorized under the governing documents, such as fining, seeking attorney assistance and, if authorized, assessing to recover the costs, seeking a legal injunction, and things like that. In the above situations, it is unlikely the Board would resort to expensive measures such as seeking an injunction. Even in more serious cases, if a nuisance affects only one household, as opposed to a neighborhood or the entire development, it is unlikely that a drastic expenditure would be approved. That does not mean the Board is without other less drastic remedies. However, sometimes there are reasons why the Board may not choose to get involved.

3. Explore your own remedies. As an owner, you can enforce the governing documents. What that means is that you can sue someone to seek compliance, that is clear. Although an owner does not really have the authority to schedule a hearing and fine an owner or assess for costs such as for attorney assistance, the owner can bring an action in small claims court and ask for damages and recovery of attorneys fees paid to write a demand letter to the neighboring owner. Likewise, an owner does have the right to cite nuisance as a cause of action even if the governing documents do not have prohibitions against nuisances.

As for making your case, these are my thoughts on the above types of issues.

Daytime family and children noise is probably not actionable but if it is eggregious or goes on all night (which may be captured on tape or via a log of activities showing unnecessary or excess behavior) a disturbed owner might get a damages award, or the defendant might get a warning. If the dog barking is excessive, one might get a damage award but likely you would have to show that you contacted the local animal control officials first and were unable to get any relief.

Smoking is different with respect to at least one important factor. It is hazardous to one's health. If it is coming through the ventilating systm, the Board may or may not decide to take action, but either way, someone should put in writing a request/demand to use an air freshening system to the neighbor(s) who smokes. The person disturbed should try to do the same. It is difficult for a Board to make a demand preventing someone from smoking in their own home. But if there is a way to isolate systems so that the smoking fallout is minimized, it may be worth exploring. If the smoking takes place outside and the wafting air prevents a neighbor's enjoyment of their own deck or balcony upstairs, the Board might decide to address that as a nuisance. But if it does not, you can. again, you are not without remedy. You can use small claims court as a venue and try to get a damages award and order from the judge or hearing officer that the smoke needs to be contained.

As for the upstairs bedroom noise. I have had some rather creative suggestions for disturbed neighbors. If its a creaking or squeaking bed, offer a can of Wd40. Just the suggestion of "you" hearing them might minimize the disturbances in the future. If its a jumping bed, offer up casters. If its the noise, and open windows are the culprit ask the neighbors to get a ceiling fan or air conditioner (if allowed by the governing documents), or get one for yourself, and try that. If its intolerable, tape the noise and file a small claims complaint.

Nuisances that are really unbearable may well get the attention of a small claims judge or referee but be prepared - if you do not get any relief through asking the board or pursuing it yourself in small claims court, maybe its a case of "sucking it up" or putting your place on the market. Be careful about pushing your way into a lawsuit and ending up with - worst case scenario - having to pay your attorney, the other party's attorney, and being left with an undeniable nuisance (by your own admission in court papers) to disclose.

Posted by Beth Grimm at 8:51 PM