2017 Legal Update

Provided by Kulik Gottesman Siegel & Ware LLP

SUMMARY OF DAVIS STIRLING ACT AMENDMENTS FOR 2017

As most of you know, the majority of laws that apply to homeowner associations that are charged with the duty of managing and operating condominiums, townhomes, and planned unit developments in California, are found in the Davis-Stirling Common Interest Development Act at Sections 4000, et seq. of the Civil Code.  The Act was originally operative January 1, 1986 but has been amended nearly every year since that time.

Here is a brief summary of the amendments adopted by the legislature for 2017, along with an overview of recent decisions of California courts which pertain to common interest developments.

Maintenance of Exclusive Use Common Areas – Civil Code §4775

Section 4775 of the Civil Code has historically held associations responsible for “maintaining, repairing, and replacing” the common areas while owners are responsible for “maintaining” their exclusive use common areas, unless the governing documents state otherwise. There has always been a question whether it was intentional, or inadvertent, that the legislature refers only to “maintaining” the exclusive use common area but refers to “maintaining, repairing and replacing” the common areas. In sum, Section 4775  fails to expressly specify who is responsible for “repairing and replacing” the exclusive use common areas if the community’s governing documents do not clearly address the issue.

Section 4775 has been amended to answer that question.  Effective January 1, 2017, unless your governing documents expressly say otherwise, associations will be responsible for “repairing and replacing” the exclusive use common areas while other owners are responsible for “maintaining” them.

This, of course, is absurd because many repairs or replacements are necessitated by a failure to maintain. To separate the duty to maintain from the duty to repair is unworkable. Thus, the necessary solution is to ensure that your Governing Documents (e.g., your CCRS) expressly say that the association must maintain, repair and replace the common areas but the owners must maintain, repair and replace their exclusive use common area.

Owners’ Notice of Address Requirement – Civil Code §4041

As of January 1, 2017, an owner of a separate interest (lot or unit) will be required to give written notice to the association of his/her mailing address on an annual basis.  Owners must disclose the following information each year:

(i)        The address or addresses to which notices from the association are to be delivered.

(ii)       An alternate or secondary address to which notices from the association are to be delivered, if the owner so desires.

(iii)      The name and address of his or her legal representative, if any, including any person with power of attorney or other person who can be contacted in the event of the owner’s extended absence from the separate interest.

(iv)      Whether the separate interest is owner-occupied, rented, vacant, or the lot is undeveloped land.

Associations must solicit such notice from each owner, in writing, on an annual basis not later than thirty (30) days before the association distributes its Annual Budget Report.  If the owner fails to respond and provide the notice, his or her unit/lot “address” shall be deemed to be the address to which notices are to be delivered. Civil Code Section 4040(b), which requires the association to deliver an additional copy of specified notices to an owner’s secondary address, if directed by the owner in writing, is still operable.

Construction Defects – Civil Code §6000

Under current law (referred to as the “Calderon Process”), certain conditions to be met before an association may file a complaint for damages against a builder, developer, or general contractor of a common interest development based upon a claim for defects in the design or construction of the common interest development. Civil Code Section 6000 is set to expire July 1, 2018.

The amendment extends, until July 1, 2024, the requirement that a homeowners association with more than 20 units or lots must adhere to a pre­ litigation dispute resolution procedure before commencing a design of construction defect action against a builder, developer, or general contractor.

FHA and VA Disclosures – Civil Code §5300(b)(10)-(11)

Current law requires the Annual Budget Report to include a separate statement indicating whether the development is an approved condominium project under Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) guidelines. The statement is now required to be in at least 10-point font on a separate piece of paper in the form required by the statute.

Use of Pesticides – Civil Code §4777    

Landlords are currently required to provide notice to tenants if pesticides are used at the tenant’s unit or in common areas, if the landlord applies a pesticide without a licensed pest control operator.

Under a new law, common interest developments must provide notice to an owner and/or his or her tenant, if pesticides are applied without a licensed pest control operator to a separate interest or to common areas in the development.

In addition to the foregoing, here is a summary of important case decisions from the appellate courts from this past year.

Palm Springs Villas II Homeowners Association, Inc. v. Parth, 248 Cal.App.4th 268 (2016)

A homeowners association sued an eighty-seven (87) year old former Board member and President for alleged breaches of the Bylaws:

  1. At the request of the property manager, the President went to the management office and signed a one year contract extension with the Association’s security company. The extension, however, was not voted on at a noticed Board meeting.   Purportedly believing that the security company was working on a month to month basis, the Board terminated the contract, and was sued for by the contractor for early termination.
  2. The President located and referred a roofing company to the Board of Directors to perform a development wide roofing project on a time and materials basis.  The Board hired and paid the roofing company.  The Association subsequently contended that the work was deficient and the roofing company was not licensed.
  3. Over a four year period, the President signed promissory notes totaling over $1.7 million to fund common area paving and walkway projects. A majority of the Board executed a resolution approving the loans and authorizing the President to sign the loans.  However, the Bylaws required approval by the members.
  4. The President and a majority of the Board executed a 5 year landscaping contract extension despite a Bylaws provision requiring member approval of a contract with a term over one year.
  5. The director testified that she “acted in good faith in an attempt to facilitate the best interest of the Association.”
  6. The director did not have a pre-existing business, familial or social relationship with any vendors who were retained to perform services for the Association while she was on the Board.
  7. The director did not obtain any pecuniary gain or personal benefit.

The Court of Appeal reversed a trial court’s entry of summary judgment based on the business judgment rule, i.e.,   “a director is not liable for a mistake in judgment which is made in good faith and in what he or she believes to be the best interests of the corporation . . . .”  (See, e.g., Barnes v. State Farm Mut. Auto. Ins. Co. (1993) 16 Cal.App.4th 365, 378.)  The Court of Appeal adopted a new “standard of reasonable diligence.”   The Court held that regardless of whether Director acted in good faith, and even if her conduct constituted on honest mistake, “reasonable diligence” is a “’factual prerequisite to the application of the business judgment rule.’”

Almanor Lakeside Villas Owners Association v. James Carson 246 Cal.App.4th 761 (2016)

Homeowners purchased properties to use as short-term vacation rentals.  The Association’s CC&Rs provided that lots could not be used for transient or hotel purposes or renting for fewer than thirty days, unless the owners provided the board with the rental agreement at least seven days before the rental period. The homeowners rented the properties to transient guests without providing the Association with the rental agreement.

The Association fined the owners for the violation and for past due assessments including interest, for a total of $54,000. The court found most of the fines were unenforceable but still awarded the Association $101,803 in attorney’s fees, which was upheld on appeal. Even if the court rejected some of the fines, the association could still be treated as the prevailing party. In this case, even though most of the fines were disallowed, the association was the prevailing party because the court upheld the reasonableness and thus the legality of the rules it was enforcing.

Rancho Mirage Country Club Homeowners Association v. Hazelbaker, 2 Cal.App.5th 252 (2016)

The Association’s architectural committee consented to improvements to an owner’s  patio. After the alterations were made, the Association concluded that the changes exceeded the scope of what had been approved. The owner agreed pursuant to a settlement agreement reached at mediation to make modifications within 60 days to comply with the original approval, but subsequently failed to do so.

The Association sued the owner for specific performance of the mediated settlement agreement. The parties made another settlement but disagreed about who should pay the  litigation costs. The court found that the Association was entitled to attorney fees because it was the “prevailing party.” The case establishes that even when a settlement is reached at mediation,  if there is no agreement on legal fees and costs, the court may still decide who is the prevailing party, the one who “achiev[ed] its main litigation objectives.”

Castillo Condominium Association v. U.S. Dept. of Housing & Urban Development, 821 F.3d 92 (1st Cir. 2016)

An owner kept a dog in his condominium in violation of the association’s pet prohibition, which was otherwise legal in this particular jurisdiction. The owner stated that the dog was an emotional support animal who assisted him with his depression and anxiety, but the Board refused to make an exception to their no-pets rule. The owner sued under the Fair Housing Act, which prohibits discrimination in housing based on a person’s disability.

The  Department of Housing and Urban Development found in favor of the owner and awarded $20,000 in emotional distress damages and a fine of $16,000. The court affirmed since there was sufficient evidence that the owner was disabled and that the Association had notice of the disability. Therefore, the Association should have allowed a reasonable accommodation and granted the request for an exception to the no-pets rule.