Is Fido truly a support animal? Associations and managers have few options in regards to assistance animals. By Matt D. Ober, Esq., and Kelly G. Richardson, Esq.
The psychological benefits of animal companionship to the emotionally disabled are well-established, and federal and state fair housing laws have long recognized that animals
may be a reasonable accommodation to help them. However, the law presently provides little guidance, and associations and their managers struggle with compliance while at the same time dealing with perceived
abuses by those who falsely label their pets as “support� animals to circumvent pet rules. California’s Fair Employment and Housing Act is found beginning at Government Code 12900, and
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is primarily enforced by the Department of Housing and Urban Development. At the federal level, the Fair Housing Act is part of the 1968 Civil Rights Act, and is primarily enforced by the Department of Housing and Urban Development. Both the federal and state laws may also be enforced by private litigation, and those who err in this area will be liable for the claimant’s attorney fees. Because private enforcement is available, associations and their managers may also find themselves defendants in a civil suit, seeking injunctive relief, damages and attorney fees (which are by statute awarded against violators). California is about to add some clarity to the subject, as in the coming months regulations will take effect which address some of the questions regarding animals and disabilities. While there are many terms for animals supporting the disabled, the new California regulations will use the overall term “assistance animals,” which fall into two types – “service animals” and “support animals.” A service animal is a specially trained animal which performs a specific task helping its owner with a disability, while support animals (sometimes referred to as “comfort animals”) provide emotional support and are not necessarily trained or certified. Per Civil Code 54.1, service animals include guide dogs (for visually impaired persons), signal dogs (hearing impaired persons), service dogs, and miniature horses, per Title 28 Code of Federal Regulations §§ 35.13.136(i). 2
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While service animals are limited to dogs and miniature horses, support animals apparently can be any creature. Neither the federal Fair Housing Regulations nor the upcoming California Fair Housing Regulations provide any guidance or limitations on what animals can be support animals, only that the need for the animal be documented by a person eligible to certify the need. The law is clear about a few things. 1. Deposits or insurance cannot be required as a condition to have an assistance animal. 2. No breeds are automatically considered “unsafe,” so any breed can be an assistance animal. 3. The mere fear that the animal may cause problems is not a sufficient reason to deny the assistance animal. The accommodation only becomes unreasonable if the animal causes problems. 4. The accommodation and the person’s disability also must be kept confidential, as per upcoming regulation section 12176(b). 5. Disabilities which are obvious (such as blindness) are not required to be documented to the association. Only disabilities which are not obvious must be documented with the confirmation of disability and the necessary accommodation requested. That documentation also must be kept confidential. The upcoming regulations also make it clear that a broad variety of persons can attest to a person’s disability and need for an assistance animal. Under these regulations, not only mental health care professionals, but any health care provider, peer support group member, a caregiver or “any other reliable third party
who is in a position to know” about the person’s disability, per Section 12178(f), can authenticate the disability. Once the documentation is received by the association or its manager, no further inquiry is permissible. Again, that documentation is confidential. If the animal causes problems of any kind, the resident can be held accountable for those problems, but the association should be careful to pick its battles wisely. A growing trend in the fair housing world, and one required by the new regulations, is the “interactive process.” If there are concerns regarding a requested accommodation, the association is expected to work with the requesting resident to resolve the concerns. Conversely, the association can offer alternatives to the reasonable accommodation request as detailed in section 12177 of the regulations. This is an important, if not the only, tool the association has in the process. Associations and managers should have legal counsel brief them on how this process works.
Will California HOAs increasingly look like Noah’s Ark or the zoo? Until and unless the Fair Housing authorities place more definitions and limits on the term “assistance animal,” managers and attorneys will need to work together to protect associations and keep them out of courtrooms as much as possible. However, presently, the DFEH feels that it cannot go beyond what the HUD guidelines state, and HUD has not provided further clarity.
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A note of caution to professional managers and management company owners The new regulations at 12005(u) include “managers” in the definition of “Owner” in the new regulations, so managers can also be held accountable for mistakes in the fair housing arena. Associations and their managers should be careful to document interaction with residents on these issues, show abundant reasonableness, pursue the “interactive process” with the requesting resident, and remember to pick battles carefully. The consequences of a mistake can be quite expensive. ABOUT THE AUTHORS Matt D. Ober, Esq., and Kelly G. Richardson, Esq., are principals at the Richardson | Ober law firm headquartered in Pasadena. They have been practicing HOA law throughout Southern California for 30 years.
Guest Editor’s Note Greetings Readers! The Fall Law Journal Editorial Committee hopes you find value in the five articles offered in this edition. The title for this edition is: “Timely Tips for Timeless Traps.” Here are the five articles we offer for your consideration: • Joseph L. Gillman of SwedelsonGottlieb writes about fraud and embezzlement statutes and the risks of noncompliance. • Jordan M. O’Brien of Angius & Terry, LLP, writes about managing risks within a vendor’s contract as it relates to indemnity and insurance. • Dyanne L. Peters and Tiffany N. Smith-Nguyen of Delphi Law Group, LLP, debate the pros and cons of sealed bid protocols and when they should be used. • Lisa Marie Black of Berding | Weil, LLP, details how to be prepared for disaster with your governing documents. • Matt D. Ober and Kelly G. Richardson of Richardson | Ober, PC, talkabout support animals and what rules you should know when enforcing pet policies. What ties these articles together? They all involve hidden traps for managers and their associations and how to avoid them. After you have read them, let us know if you liked the job we did. If there is anything else we can do to make a manager’s life easier in your opinion, tell us. The Law Journal team for 2019 is at your service. James Judge, Esq, is principal of The Judge Law Firm with offices in Irvine. He has practiced law for 30 years and is an expert on assessment collections. He has donated hundreds of hours to teaching courses for CACM.
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Disaster Preparedness: Are your governing documents ready if a disaster strikes? By Lisa Marie Black, Esq. – Berding | Weil, LLP
possibly appropriate) step triggered?
Being prepared for disaster
includes maintaining documents that work in the worst of times. Recent fires, mudslides and other tragic and destructive events tell us that disaster can strike any community. While there are many other variables to consider, an association must consider its governing documents in its overall disaster preparedness plan. The last thing an association should have to do after a disaster is to amend its governing documents. Thus, the Declaration of Covenants, Conditions and Restrictions (“CC&Rs”) and rules should be evaluated before the worst happens. Below are suggested steps for ensuring that your association clients’ governing documents are prepared for disaster.
Governing documents should assist the HOA after a disaster
First, get a handle on it. “Damage or destruction” provisions in the CC&Rs usually set forth the duties of an association (and sometimes individual owners) have after a destructive event. The CC&Rs should provide an association with the authority and the flexibility needed to deal with various destructive events, such as: 4
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• How do the provisions differ depending on whether the damage is to a common area or units/lots? • Is there sufficient insurance to repair the property (modern CC&Rs) or is there “substantial impairment” or “minor/major damage” (older CC&Rs)?” Are dollar amounts outdated? • Who obtains the reconstruction bids and decides which bid to take? Who is ultimately responsible for the repairs and rebuilding? • Do the owners have any role in the decision-making after disaster strikes? Do they vote at a meeting or by written or secret ballot? What is the member approval required? • How does one deal with shortfalls in insurance coverage? Is a special or other assessment mandated, and if so, is there a different allocation scheme than normal? (E.g., is the assessment levied against only the effected owners, or all of the owners? Does the allocation depend on unit square footage or is it equally distributed?) • Do provisions allow for the sale of the entire development? Under what circumstances, and how is such a drastic (but
Second, uncover “hidden” issues. A disaster audit of the community’s CC&Rs should also include a title review to reveal any hidden issues that could arise and impede an association after a disaster. Sometimes one discovers that not all the association’s property is properly “annexed” into the development. Sometimes the developer never properly conveyed ownership of the common area to the Association, or recorded grant deeds misstating owners’ percentages of common area ownership. These issues could result in postdisaster “after shocks” of insurance coverage denials or battles over how much proceeds are payable to the association or the owners. Third, play it out. Once you have a “handle” on the damage/ destruction provisions, ask if they work for the community. Compare perils that are often insured (fire) to those that may be underinsured, or not insured, such as earthquakes or floods. Damage/destruction provisions often differ based on the legal and physical type of the development, for example, a stacked condominium versus a townhome versus a detached home planned development. They should also take into account sitespecific conditions. One may need different provisions if the common Continued on page 5
area includes buildings, clubhouses or just open space. Moreover, a condominium or townhome development, depending on how it’s insured, may benefit from provisions making the association responsible for residential building restoration to protect the entire community from owners who might take the insurance proceeds and fail to rebuild. A comprehensive review would consider these provisions in conjunction with how the community holds its property insurance. Other intersecting provisions include assessments, ownership of the common area, and possibly the mortgagee (lender) protection provisions, which could restrict use of insurance proceeds, sale of the common area or even amendment of the damage/destruction provisions themselves. Appropriate damage or destruction provisions should also consider when board action is warranted and when owners should decide. Consider that owners may not be easily contacted or focused on the association’s concerns. Fourth, fix it! An association may also wish to consider adding provisions to the governing documents to give it further flexibility in a crisis. Don’t forget that rules and policies, which don’t require a membership vote, can supplement the CC&Rs and be easily altered to fit changing needs. Requiring that owners provide an emergency contact may be helpful when owners’ normal contact information is altered by a crisis. An association’s governing documents can dramatically impact how (and even if) a community rebuilds after a destructive event. Serious evaluation of an association’s CC&Rs and rules is warranted to address any changes needed before disaster strikes. ABOUT THE AUTHOR Lisa Marie Black, Esq., has practiced real estate-related law for 15 years. She works at Berding | Weil, LLP’s Walnut Creek office. Her specialty is HOA governing documents, governance issues and real property title issues.
Manage your risk wisely Look for indemnity provisions and potential liability in vendor contracts. By Jordan M. O’Brien, Esq.
Managers are often told
by their attorneys and at industry sponsored educational seminars that they always need a special, attorney-written contract for major projects. The definition of what is a major project depends on who you are talking to. The thresholds range from $10,000 or even less to any project that is over $150,000. The rest of the projects, once one figures out the threshold for major projects, are minor projects. In such instances, rather than paying lawyer fees, boards and managers may be more inclined to go along with signing the vendor’s own contract. But what are the risks involved with such contracts? How can an association use those contracts and still avoid the risks?
How to safely use a vendor’s contract
Vendor contracts are often provided on industry-
approved and sometimes deceptively user-friendly forms that include numerous potential traps. Many vendor contracts include a limitation of liability, which limits the vendor’s liability for damages arising out of its work under the contract either to the value of the contract or to the amount of damages incurred by the association — whichever is less. In many cases, however, the damages that a vendor can cause may vastly outweigh the value of the contract. Think of the amount of damage that a landscaper could cause by damaging the irrigation, flooding a unit, etc., versus the typical amount of such contracts. In such situations, the association can, and should, negotiate an alteration to the contract that more equitably distributes the risk between the association and vendor, or negotiate the elimination of Continued on page 6
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Manage your risk wisely Continued from page 5
such a provision altogether. While interlineating a vendor contract can prove challenging, especially since all of the changes usually have to be written in by hand and initialed, one easy way to make this and other changes to a form contract from a vendor is to simply write an addendum. An addendum is a written attachment to the vendor contract that changes any terms of the vendor contract. The addendum should be signed by all parties or initialed, and, preferably, run by the association’s legal counsel. Indemnity provisions can also crop up in many vendor contracts and present potential pitfalls for associations. Indemnity provisions apportion liability between parties to a contract. Many vendor contract provisions actually require the association to indemnify, hold harmless and defend the vendor from any and all claims, costs, expenses, demands, etc. arising out of or in connection with its work under the contract. Obviously, this opens the association up to potentially enormous liability, and in most cases represents an unacceptable imposition of risk upon the association. Associations, with the help of their attorneys, can and should negotiate a fairer apportionment of risk. One way is to limit the scope of the association’s indemnification of the vendor to claims, costs, etc. arising solely out of the association’s negligence. Even better, the association should negotiate a reversal of the indemnification, wherein the vendor indemnifies the association for any damages 6
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arising out of the contract, except, as stated above, where the damages arise solely from the association’s negligence. At any rate, this is an extremely important provision that associations should not feel that they are forced to accept as written by the vendor. Most vendor contracts also include a provision relating to insurance, but it will frequently be the opposite of what it should be. Here too, associations should be circumspect. A key concern is ensuring that the association is adequately protected as an additional insured, meaning the association is covered under the vendor’s insurance policy. However, even if a vendor contract includes reference to additional insured coverage, the association should ensure that the vendor actually provides an endorsement naming the association, its board and management as additional insureds under its policy. And the endorsements themselves may also be problematic. Some endorsements include language limiting coverage to situations where the endorsement is as required by contract, meaning that if the underlying vendor contract does not require additional insured coverage, then the association may not actually qualify for additional insured coverage under the policy. Insurance issues relating to vendor contracts can be particularly complicated, and where there is any doubt, associations should consult with general counsel in navigating this territory. For all but the most simple and inconsequential vendor contracts, an association is well advised to seek its attorney’s input,
guidance and edits before entering into them. While this article is intended to inform managers what to look for, and possibly change by addendum, in vendorgenerated contracts, as they say, depending on circumstances, managers and boards may not want to go it alone in these situations. While not as expensive as a fullblown contract from the attorney, counsel for an association should be able to inexpensively assist in negotiating and/or rewriting the terms of vendor contracts discussed above: limitations of liability and indemnification, insurance provisions and additional insured endorsements, among other issues that may arise, so as to adequately protect the association. Cost-conscious boards are not going to want to hire an attorney for every contract. While input from association counsel always comes in handy, it is sometimes far less expensive to involve an attorney in a vendor contract than paying for an attorney-generated one. Moreover, keeping the pitfalls mentioned in this article in mind, associations can enter into contracts presented by vendors for small projects. This option will save costs and, if properly administered, still protect the interests of the association, its board, its management firm, and the manager.
ABOUT THE AUTHOR Jordan M. O’Brien, Esq., is a partner at Angius & Terry, LLP, a law firm specializing in community association law, including construction defect litigation.
State adopts new fraud and embezzlement statutes Non-compliance puts you at risk. By Joseph L. Gillman, Esq.
Community associations have a
lot of money, which makes them a prime target for embezzlement. Unfortunately, and perhaps by necessity, many boards become too trusting and don’t have the wherewithal to keep an eye on what other board members or their managers are doing with the association’s resources. Board members rely on their agents, and this reliance leads to blind trust in some instances. While most managers and board members would not take action to harm their associations, some do. This problem may be especially acute in smaller associations that are unable or unwilling to cover the cost to hire a qualified financial accountant. Larger associations, which meet income requirements under certain statutes, are required by law to have a higher level of financial review or audit by a qualified CPA in addition to the board-level requirements, as discussed below. In 2019, the California legislature acknowledged that community associations
are susceptible to fraud and embezzlement. The state adopted legislation that increased the financial oversight required of an association’s board of directors and implemented certain insurance requirements to protect against fraudulent financial transfers. These legal requirements and their implications are discussed below. • Civil Code §§ 5380 and 5502 prohibit associations from making transfers greater than $10,000 or 5% of the association’s total combined reserve and operating account deposits, whichever is lower, without the board’s prior written authorization. For associations with regular reoccurring expenses that exceed the Civil Code’s transfer limit, obtaining the board’s prior written approval for each and every fund transfer may prove burdensome and timeconsuming. In these cases, a board may consider approving these expenditures in advance.
Another option is to adopt a board resolution granting management a blanket authorization to make these fund transfers, as the law requires the board’s prior written approval, but it does not say this approval must be granted for each and every transfer. Because this law is new, as of the date of this article, neither of these approaches have been tested in court. So, it is feasible that an owner could challenge any authorization by the board short of a case-by-case approval of each expenditure that exceeds the Civil Code’s transfer limit. That said, the likelihood of an owner challenge to an association’s payment of regular reoccurring expenses to cover routine services is (in this author’s opinion) unlikely. For non-recurring expenses, boards must adopt a written resolution for each fund transfer as the need arises. Without that approval, any such non-recurring expenditure could be challenged. Importantly, a managing agent should never transfer funds without this written authorization to avoid personal liability. • Civil Code §§ 5500 and 5501 require all boards to review certain financial records on a monthly basis, unless the governing documents require more frequent review. These records include the association’s operating and reserve bank statements, income/expense Continued on page 8 THE LAW JOURNAL | WWW.CACM.ORG
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statements, and reconciliations of those statements, as well as the association’s check register, general ledger, and delinquent accounts receivable report. A board may delegate this review to certain specified individuals acting as a subcommittee of the board, but the board must ultimately ratify the results at a board meeting subsequent to the subcommittee’s review, and this ratification must appear in the minutes. If the board is reviewing financials on a monthly basis but does not catch a discrepancy (such as an apparent theft or misuse of funds) it is unlikely that the board members will be personally liable for the loss. However, if a theft or other misuse of funds were to go unnoticed for many months because the board was not meeting its legal obligation to review the association’s financials, liability may attach for the board’s non-feasance. • Civil Code § 5806 requires
each association to purchase a fidelity bond. A fidelity bond is a form of insurance that offers protection against losses stemming from fraudulent or dishonest acts. Under this law, associations must maintain fidelity bond coverage for their directors, officers, employees, and managing agent, if any. Preliminarily, an association should have fidelity insurance, and the obvious risk here is not having that insurance if/when it is needed. If there is a loss, it is unlikely that the association’s members will be satisfied (or happy) covering that loss through their assessment payments and may seek to recoup their loss from the individual board members by suing them individually for failing to comply with the legal obligation to purchase and maintain a fidelity bond. This is a serious issue, as the statutory indemnity afforded under Civil Code § 5800 may not extend to board members that fail to obtain a fidelity bond.
Together, the new statutes discussed above are intended to keep an association’s funds better protected. Nothing is going to protect an association from fraud and embezzlement with 100% certainty, but the monthly reviews should help boards catch a bad act sooner and the fidelity bond required by law should cover most losses that occur. The primary risk of noncompliance is that an association (and its members) will have to bear a loss on its own due to a lack of fidelity insurance. If the board has not been reviewing the association’s financials as required by law and is sued by the members as a result of the loss, the board members may find that they are not shielded from individual liability by the general protections typically afforded under the association’s governing documents and California law. ABOUT THE AUTHOR Joseph L. Gillman, Esq., is a community association attorney with SwedelsonGottlieb, a law firm with offices in Newport Beach, Palm Desert, Los Angeles, San Francisco and Ventura.
Should you use sealed bid protocols? By Dyanne L. Peters, Esq. and Tiffany N. Smith-Nguyen, Esq.
At an open meeting of the board
of Happy Homes Association, the board is considering bids from three different vendors for pest control services. A very concerned homeowner asks if the association followed a “sealed bid protocol” because he read on the internet 8
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this is required for associations. Is Mr. Very Concerned Homeowner correct?
What is a sealed bid protocol?
A sealed bid protocol is when bids solicited from vendors for a contract are given to the association sealed by the vendor. Once the bids
are opened, the board makes a decision on which bid to accept based only on the content of the bids. No one, not even the manager, is privy to the content of the bids. The CACM Code of Continued on page 9
Professional Ethics and Standards of Practice (hereinafter the “COE”) Rule 5.01.2 requires the use of a sealed bid protocol when the association’s manager or management firm has a conflict of interest listed in the rule. This rule states: Where a contract for goods or services is to be competitively bid and the member or an allied, related and/or affiliated company of the member is a bidder such bid shall be based on precise written specifications provided to each bidder. The member shall employ a sealed bid process wherein all bids are received sealed and are opened in the presence of the client board or its designated representative other than the member. In other words, a sealed bid protocol is only required where a manager or their company has an allied, affiliate or business interest with a bidding vendor. Although not always required, that doesn’t mean there aren’t other legal, ethical or practical reasons to use the sealed bid protocol. For example, one of Marcella Manager’s associations is looking for a new landscape vendor. Marcella’s brother just happens to own Perfect Landscaping Company. After discussion, the Board decides to solicit bids from Perfect and two other vendors. Even though Marcella derives no direct benefit from any contract with Perfect
and would never use her position to help Perfect underbid the other vendors, use of a sealed bid protocol prevents even the appearance of impropriety. Although a sealed bid protocol is not always required, it may benefit associations and managment to make use of a sealed bid protocol for some contracts, particularly where there is a relationship between the manager and the vendor.
Pros and cons to using a sealed bid protocol
The most obvious benefit to managers in utilizing a sealed bid protocol is that the procedure avoids conflicts of interest. Even in situations where the relationship between the manager and the vendor does not rise to the level of a conflict of interest, implementing a sealed bid protocol can be a good idea for other reasons. Namely, even if the manager doesn’t benefit directly, it avoids the appearance of favoritism or unfair preference for a particular vendor. However, there are potential disadvantages as well. The manager’s opinion can be an important resource for the association in the selection of a vendor. Additionally, since the manager would not know what the bids contain until they are opened, if one or more bids are missing information or confusing, the manager cannot request clarification prior to the board meeting. This can delay the vendor selection process if the board requires more information to make a decision.
Managers beware of “putting a finger on the scale”
bid, or even when there is, managers need to be careful to not get carried away with helping their favorite vendors. Managers should be wary of attempting to get vendors to undercut their prices or services in order to beat out a competing bid. This can actually reduce the quality of service and value they receive from that vendor. It is important for managers to carefully consider whether a sealed bid protocol is needed to prevent any accusation of favoritism. A sealed bid protocol is only required where a manager or their management company has an allied, affiliate or business interest with a bidding vendor. However, using a sealed bid protocol can help avoid conflicts of interest and the appearance of impropriety. It may be beneficial to use a sealed bid protocol for contract bids because it protects the association and manager and helps preserve working relationships with vendors. When soliciting bids, managers should first consider whether a sealed bid protocol is required under the circumstances. When a sealed bid protocol is not required, managers and boards may decide whether or not the use of a sealed bid protocol is appropriate for them. ABOUT THE AUTHOR Dyanne L. Peters, Esq., and Tiffany N. Smith-Nguyen, Esq., practice CID law at the Delphi Law Group, LLP, which specializes in CID corporate counsel and litigation services in Carlsbad, San Diego, Orange County, the Inland Empire and the Coachella Valley.
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