ECHO Journal - February 2009 by Echo

February 2009

A Journal for California Community Association Leaders

echo-ca.org

Times are Tough Get Creative!

ALSO INSIDE THIS ISSUE:

• Statute and Case Law Update • Survey of Financial Statements • Officers and Directors Update

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The ECHO Journal is published monthly by the Executive Council of Homeowners. The views of authors expressed in the articles herein do not necessarily reflect the views of ECHO. We assume no responsibility for the statements and opinions advanced by the contributors to the magazine. It is released with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent person should be sought.

Contents

Statute and Case Law Update page 12

The current economic crisis is impacting everyone. Countless individuals and companies nationwide, including homeowner associations, are forced to make difficult decisions. But there is a silver lining. The crisis forces all to consider options they would not otherwise consider and get creative. This article discusses creative solutions that can help associations get more from less in their day-to-day business.

2008 Statute and Case Law Update Legal developments in 2008 affecting homeowner associations were predominated by case law. California Court of Appeal decisions evidence the ever growing importance of common interest developments in California real estate. In this article, Attorney Jeff Barnett provides his annual update of new requirements for CID operations.

Times Are Tough. Get Creative!

Survey Of Financial Statements In late 2008, ECHO and CPAs Levy, Erlanger & Company, completed a financial survey of approximately 1,500 Northern California community associations. The associations included large and small developments, urban and rural projects, new and old associations, and managed and self-managed developments. The results of the survey are presented in this article and provide data with which your own association status may be compared.

Departments 28 Directory Updates 33 News from ECHO 34 ECHO Bookstore 36 Calendar of Events 38 ECHO Volunteers 38 About ECHO 41 ECHO Marketplace

The ECHO membership list is never released to any outside individual or organization.

Executive Council of Homeowners, Inc. 1602 The Alameda, Suite 101 San Jose, CA 95126 408-297-3246 Fax: 408-297-3517 www.echo-ca.org info@echo-ca.org Office Hours: Mondayâ&#x20AC;&#x201C;Friday 9:00 a.m. to 5:00 p.m.

Board of Directors and Officers President David Hughes Vice President Karl Lofthouse Treasurer David Levy Secretary Dorothy Kopczynski Directors Paul Atkins John Garvic Diane Rossi Richard Tippett Steven Weil

Jerry L. Bowles Robert Rosenberg Kurtis Shenefiel Wanden Treanor

Executive Director Oliver Burford Communications Coordinator Tyler Coffin Legislative Consultant Government Strategies, Inc. Design and Production George Oâ&#x20AC;&#x2122;Hanlon

42 Officers/Directors Update

ECHO Mission Statement

Times are Tough page 6 February 2009 | ECHO Journal

41 Advertiser Index

On the Cover 4

Acceptance of advertising does not constitute any endorsement or recommendation, expressed or implied, of the advertiser or any goods or services offered. We reserve the right to reject any advertising copy.

The mission of ECHO is to advance the concept, interests and needs of homeowner associations through education and related services to board members, homeowner members, government officials and the professionals in the industry.

New election rules: $500 In today’s economic crisis, there may be some items that associations can cut to reduce costs. ECHO membership is not one. Let’s face it, educated board members are better fiduciaries, which helps them to avoid costly law suits and possibly personal liability. ECHO is the premier resource in California for board member education. ECHO offers new articles each month with practical and easy to understand advice about current California requirements, and what may be on the horizon. ECHO staff is available by phone or E-mail to answer members’ questions about association problems or to recommend competent professional services when necessary. And with discounted member rates at more than a dozen educational events throughout the year, ECHO is simply the best educational resource for California homeowners. Avoid Litigation Each year, as a member benefit, ECHO sends every board member a copy of the updated Community Association Statute book. Every issue of the ECHO Journal and every seminar examine one or more aspects of compliance with association law, because one of the major causes of expensive litigation is ignorance of the law.

Mailing ballots: $200 Make Better Financial Choices Many associations struggle to understand reserve funding requirements and strategies, the benefits and disadvantages of using special assessments, proper collections practices, and even how to determine what components the association is required to maintain. At a time when wise financial planning is essential, ECHO members have access to a wealth of articles about reserve funding, budgeting, insurance, collections, and much more. Fight Costly Regulation Every year, Sacramento legislators introduce more legislation that confuses the job of California board members and increases the costs of compliance. ECHO is committed to fighting unnecessary regulation in California and promoting the interests and welfare of common interest developments. Hire Competent Professionals ECHO offers a variety of articles and publications to help members evaluate their service providers, including questions to ask prospective management firms and contractors. All ECHO Journal articles are available to members at no cost, and publications are sold to members at a discount.

Avoiding a lawsuit: Priceless. Spend a Little, Get a Lot The cost of ECHO membership is minimal. In a worsening economy, associations are looking to cut big expenses from their budgets. Yet, ECHO membership is as little as 25¢ per unit each month. For that small cost, here’s what every board member receives as part of being a member of ECHO: • A subscription to the ECHO Journal • An annual copy of the current Community Association Statute book • Unlimited access to ECHO’s library of past articles • Telephone consultations with ECHO staff about their problems • Reduced fees for ECHO events • Discounted prices on publications • And much more… In These Tough Economic Times, ECHO Membership is a Necessity As the only California organization devoted exclusively to board member and homeowner education, ECHO is a one-of-a-kind resource that your association can’t afford to lose.

February 2009 | ECHO Journal

By Brian E. Martin, Esq.

Times Are Tough. Get Creative! economic crisis facing our country today is Theundoubtedly impacting everyone. Given the size of the crisis, countless individuals and companies nationwide, including homeowner associations, are forced to make very difficult decisions. But there is a silver lining to a crisis like this. It forces all to consider options they would not otherwise consider and to get creative. As the

crisis has grown, we have seen a number of creative solutions implemented to help associations get more from less in their day-to-day business. The first area naturally affected by the crisis is collections. Homeowners in droves are feeling the economic pinch and falling behind on their association assessments. Many associations cannot function without this stream of income. As a

ECHO Journal | February 2009

result, associations have become creative when it comes to collections. One option associations are implementing is hiring a law firm that implements alternative billing practices, like contingency fee arrangements. Under this arrangement, the association pays the attorney a percentage of the dollars collected. The advantage is the association does not have to advance any legal fees to recoup the debt. Instead, the law firm receives a percentage of the dollars collected from the homeowner. This has saved thousands of dollars for associationsâ&#x20AC;&#x2122; legal budgets.

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Associations have become creative when it comes to collections A second option that is getting more attention is selling or assigning the associationâ&#x20AC;&#x2122;s liens or accounts receivable. Here, the association sells the lien to an investor, who may then choose to pursue collection or not; but regardless, the association receives all or some of the outstanding balance immediately. A similar but more radical approach that is taking root in Florida is the selling of accounts receivable to a third party. Here, the association sells its entire accounts receivable for dues in exchange for a monthly cash payment for the dues owed. Collections of the dues become the right of the purchasing third party. The third party makes money by charging a monthly service fee, and retaining any late fees and interest on any past due accounts it collects. The benefit to the association is it receives full payment on all of its dues each month from the third party. A third solution to the collection dilemma is implementing foreclosure. There are several factors when considering this option that will not be discussed here. Suffice to say, however, that this can be effective unless your county sheriff takes the lead established in Cook County, Illinois (Chicago). In October, the Cook County Sheriff announced he would no longer execute on eviction orders

February 2009 | ECHO Journal

that were granted after the successful completion of foreclosures. The sheriff’s position was based on his morals and, while unique, underscores the severity of the crisis and the impact it is having on everybody. Another solution some associations are implementing is an offer of amnesty to delinquent homeowners. Here, the homeowners are offered a certain period of time to become current on the principal amount owed to the association. If a homeowner pays the principal amount owed, the association agrees to waive any late fees, fines, attorney fees, and interest on the account. This solution can prompt an immediate influx of money for the association to pay for daily maintenance and build a sense of community. A twist on this approach could be offering a drawing to owners that prepay or are current on assessments as of a certain date. A second area that has been impacted by the economy is the interaction between associations and vendors. Many vendors are becoming more aggressive in their billing practices and collections. We are seeing an increasing number of disputes over the reasonableness of charges or services provided by vendors. Associations should monitor closely any additional charges they see on vendor invoices. Associations should confirm that the work was actually performed and the services are indeed “additional services,” outside the scope of any underlying agreement. If the amount for the services is high or unreasonable, an association should negotiate aggressively for a reduced fee. Associations should be careful, however, when pursuing the latter approach. Refusing to pay any amount or negotiating too aggressively could result in a mechanic’s lien or lawsuit. Vendors have become more aggressive in pursuing the amounts owned on these invoices and often record liens and file collection lawsuits. A third area that is being impacted by the economy is community maintenance. With the revenue stream impeded, associations are often forced to reconsider maintenance projects, including daily maintenance. For example, associations are holding back from starting large-scale projects such as installing a new roof and in some cases even considering shutting down amenities like clubhouses, pools and the like. Associations should exercise extreme caution when reducing services or access to an amenity and obtain legal advice about the propriety of this option. ECHO Journal | February 2009

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February 2009 | ECHO Journal

One solution associations are implementing in this situation is obtaining short-term loans. The loans can be used to help the association get through the economic crunch and avoid a logjam of deferred maintenance. Granted, the loan will have to be repaid, but this can be spread out over five to ten years, which gives the association time to absorb the expense. This can be better than the alternative, which is the logjam of deferred maintenance or, in the example above, unwanted and unnecessary roof leaks that cause damage to the common elements of the building and interior units. This only leads to additional unexpected costs to repair the damage and places a further pinch on the shrinking budget. A fourth area where associations are seeing an impact on their communities is an increase in the number of rented units. As homes become more difficult to sell, owners are turning them into rental property. The common complaint about this group is they take no pride in the community and cause a decrease in property values. Thus, many associations are inquiring about their ability to limit the number of rental units in the community and, in a few cases, taking steps to do so. This approach should also be considered carefully because the impact might force owners into foreclosure, which could have a substantial impact on property values in the community as well as reducing assessment

revenue. Always consult with an association attorney before imposing any type of rental restriction. While many of these solutions have helped associations cope with the current economic times, associations should be cautious of “creative solutions” that could end up costing more money in the end. For example, in the spirit of cutting costs, associations may decide to cut back on various services like management, legal, or accounting, and to attempt to take care of these items “in-house.” This approach is frequently risky because it often results in tasks being improperly completed or not completed at all. Ultimately such occurrences can increase the likelihood of a future dispute that will cost the association money in the long run. These risks should be avoided, even in today’s economic climate. Every association is different with different needs, but the solutions discussed in this article have proven to be effective for many complexes during this time. Inevitably, some of these solutions will become commonplace as a more efficient and effective means to do business, which is one of the silver linings we can take from this challenging time—a new and improved association.

Brian Martin is a litigation attorney at the Colorado law firm Hindman Sanchez. This firm provides legal service to more than 2,000 associations throughout Colorado. ECHO Journal | February 2009

developments in 2008 affecting homeLegal owner associations were predominated by case law. Numerous decisions of the California Court of Appeal, which are summarized below, evidence the ever growing importance of common interest developments in California real estate and the complex relationship between associations and their members. Although the California Legislature grappled with many aspects of community association operations, several bills that emerged in this session were vetoed by the Governor, including AB 2259, which 12

February 2009 | ECHO Journal

addressed the issue of rental restrictions, AB 952, concerning payment plans by delinquent owners, and AB 567, which would have established a new state agency to oversee common interest developments. Legislative Developments Civil Code Section 714â&#x20AC;&#x201D; Solar Energy Systems Existing Civil Code Section 714(a) makes void and unenforceable any covenant, restriction or condition that effectively prohibits or restricts the installation or use of a solar ener-

gy system. That statute also permits a homeowner association to impose reasonable restrictions on solar energy systems that do not significantly increase the cost of the system or decrease its efficiency or specified performance; those reasonable restrictions may allow for an alternative system of comparable cost, efficiency, and energy conservation benefits. The statute specifies industry standards that must be met in such installations and defines significant cost increases and efficiency decreases.

By Jeffrey A. Barnett, Esq.

2008 Statute and Case Law Update

As amended in 2008, Section 714 has a new sub-paragraph (e)(2), which imposes particular restrictions on homeowner associations that are evaluating applications for solar energy systems. First, the approval or denial of an application must be in writing. Secondly, if the application is not denied in writing within sixty days of receipt of the application, the application is deemed approved, unless the delay is the result of a reasonable request for additional information. The amended version of Section 714

also applies to all governing documents, including the association rules. Civil Code Section 1367.6â&#x20AC;&#x201D;Disputed Charges A new Section 1367.6 was added to the Davis-Stirling Act to permit owners to pay under protest disputed charges levied by the association, including, but not limited to, assessments, fines, penalties, late fees, collection costs and monetary penalties imposed as a disciplinary measure, and then to pursue an action in Small Claims Court to determine the validity of the disputed charge or sum levied by the association. The association

retains its right to record liens for delinquent regular and special assessments and to foreclose those liens. The owner may pursue recovery of the payment under protest in a Small Claims action while also pursuing the internal dispute resolution procedure under Civil Code Section 1363.810. The owner may only dispute assessments, fines, penalties, late charges, collection costs and monetary penalties under the new statute if the amounts in dispute do not exceed the jurisdictional limit of the Small Claims Court ($7,500 for an individual). A new paragraph was added to ECHO Journal | February 2009

the notice that is distributed to the members during the sixty-day period preceding the beginning of the fiscal year to reflect this new right of payment under protest.

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Request for Notice Section 2924b of the Civil Code was amended to empower homeowner associations to record a request that a mortgagee, trustee, or other person authorized to record a notice of default regarding a residence in the subdivision, mail the association a copy of any trustee’s deed upon sale. The law requires that the trustee mail the information to the association within fifteen business days following the date the trustee’s deed is recorded. The association’s request must include a legal description or the assessor’s parcel number of the residences, the name and address where the information is to be sent, and confirmation that the requesting party is a homeowner association. The request must be recorded at the time of the filing of the notice of default in order to be effective. The recording of such requests for notice of trustee’s sales may help associations more effectively collect assessments from lenders who take title through foreclosure. Pool and Spa Safety The Virginia Graeme Baker Pool and Spa Safety Act became effective on December 19, 2008. It requires that, after the effective date, public swimming pools, wading pools, spas and hot tubs must have drain covers that meet certain federal safety standards. In addition, certain public pools and spas must have additional devices or safety systems designed to prevent suction entrapment. It is now unlawful to manufacture for sale, offer for sale, distribute or import into the United States, a drain cover that does not meet the entrapment protection standards referenced in the statute. The Act establishes severe potential civil penalties and potential criminal liability for violation. According to the staff of the Consumer Product Safety Commission, the pool and spa safety requirements of this act preempt state laws concerning swimming pool or spa drain covers. Homeowner association pools are subject to this standard. Fire Code Amendment The California Fire Code was amended to prohibit charcoal burners and other openflame cooking devices on combustible balconies or within ten feet of combustible Continued on page 16

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Statute and Case Law Update

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construction in multi-family dwellings. The Fire Code further prevents liquid petroleum gas fueled burners having an LP gas container with a water capacity greater than five gallons (commonly known as a 20 lb. cylinder) from being located on combustible balconies or within ten feet of combustible construction. This has been interpreted to mean that standard size propane barbeques are acceptable on combustible balconies or within ten feet of combustible construction, but charcoal and other open-flame barbeques may not be operated on combustible balconies or within ten feet of combustible construction, including both horizontal and overhead construction. Exclusive Service Contracts for Video Services Effective March 7, 2008, the Federal Communication Commission ruled that cable operators cannot require condominium owners to deal exclusively with them to provide video programming service. The Commission found that such exclusivity agreements harm competition and impair the provision of programming to residents of “multiple dwelling units.” In so ruling, the FCC relied upon the Communications Act of 1934, which prohibits unfair methods of competition, but applied it to the current reality that exclusivity contracts with cable providers prevented multi-channel video programming distributors from providing satellite broadcast programming to subscribers and consumers. The FCC ruling did not address exclusivity clauses by providers of direct broadcast satellite or similar multichannel video programming distributors that are not cable operators because the 1934 Act only applied to cable operators. Existing exclusivity clauses are not enforceable, and no future exclusivity clauses may be imposed by cable operators. Case Law Update Fourth La Costa Condominium Owners Association, 159 Cal.App. 4th 563 (2008) (“La Costa”); Mission Shores Association vs. Pheil, 166 Cal.App. 4th 789 (2008) (“Mission Shores”) Under what circumstances will courts approve “CC&R amendments” (including those with lease limitations) that have not been authorized by the required number of membership votes? How will appellate courts address challenges by association

members contesting amendments authorized by trial judges? These two cases address these questions. In both, the associations filed a petition seeking judicial approval of CC&R amendments pursuant to Civil Code Section 1356. Generally, that law authorizes a court to approve proposed amendments to the CC&Rs if they have received the approval of more than fifty percent of the members, even if less than the higher supermajority (e.g., 67% or 75%) affirmative vote specified in the declaration. The court may, but is not required to, grant the petition. Among other things, it must be shown that the balloting was properly conducted, that reasonably diligent efforts were made to allow eligible voters to vote, and that more than fifty percent of the members voted for the amendment. The members of the association receive notice of the association’s application for court approval of the amendment, and they have an opportunity to object to it. The purpose of the law is to allow reasonable amendments to be adopted despite voter apathy. Thus, to obtain judicial approval of amendments, the association must show both that

the voting process was “fair” and proper and that the proposed amendments are “reasonable.”

Legal developments in 2008 affecting CIDs were dominated by case law. In La Costa, a member objected to provisions in the proposed amendments that allegedly impaired her right to lease. She claimed the amendments had to be voted on at a meeting, not by ballot (this case arose before the secret ballot process became mandatory). The Court affirmed the ballot procedure because it was not prohibited in the association’s governing documents. The

Court also determined that Section 1356 properly authorized a reduction of the required number of approvals even though the Corporations Code may have required a higher percentage of approval. The La Costa declaration also required that the amendment receive the written consent of 75% of the lenders. The Court held that this consent was obtained by the association sending the amendment to the lenders by certified, return receipt mail, together with a letter stating that the consent would be deemed given after thirty days, unless a ballot was returned. The La Costa Court also ruled that the association had satisfied the requirement of showing that a reasonably diligent effort was made to secure the vote of the members because three reminders were sent out after the ballot was mailed and a special meeting was held. Under Section 1356, the petition cannot be granted unless the Court finds that the proposed amendment is “reasonable.” The La Costa Court confirmed that the association has the burden of proving “reasonableness” Continued on page 18 ECHO Journal | February 2009

Statute and Case Law Update Continued from page 17

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and there is no legal or statutory presumption of reasonableness (as would be the case once the proposed CC&Rs amendments are actually approved by the Court or the membership). Having said that, the Court held that the association had met its burden and that the particular rental clauses objected to by the owner, including one that required leases to be in writing and another that tenants are bound by the declaration, were found to be reasonable. Importantly, the La Costa Court ruled that petitions for Court approval to amend bylaws under Corporations Code Section 7515, an analogous clause to Section 1356, can be filed after the vote is taken and do not need to be filed in advance of the balloting, as claimed by the owner. This permits the association to file one petition for Court approval of all of the amended governing documents at one time. In Mission Shores, the Court also granted a Section 1356 petition approving a CC&R lease amendment (the one at issue in this case required a minimum lease term of thirty days). The objecting owners claimed that the developer’s selling agent promised that their home could be rented on any terms, which was important to them because they bought the residence as a vacation home. The Mission Shores Court ruled that the amendment was reasonable because it applied equally to all owners and did not violate a public policy. The association’s purpose was to prevent the use of the homes as hotels. The Court also found that the ballot materials were not misleading, as claimed, and that a redline version of the amendment provided owners with the terms of the amendment. The Court also stated that the amendment was not invalid even though the association violated Civil Code Section 1363.03(g) by failing to give the owners the tabulated results of the election within 15 days. Finally, the Court found that the amendment did not impair the security interest of any lender, which would have otherwise prevented the granting of the petition, and that the amendment did not require approval of the lenders under the specific terms of the declaration. These two cases demonstrate that courts will authorize CC&R amendments that are approved by at least a majority of members,

and are “reasonable,” provided the vote was conducted in a lawful and reasonable manner. These cases have three important ramifications for boards and mangers: first, that proposed amendments will be carefully scrutinized and “cookie cutter” language may not withstand judicial review; second, that project planning before amendments are submitted to the members is essential for their success, whether by vote or judicial action; and third, that the voting process can be as important as the content of the amendments themselves. Being aware of and properly implementing voting requirements (including fairness, timeliness, confidentiality, and proper ballot maintenance) is essential for the successful conclusion of the amendment process. E. Miles Harvey vs. The Landing Homeowners Association, et al., 162 Cal.App. 4th 809 (2008) What legal standards will a court employ in reviewing a decision of the board of directors concerning the interpretation of the CC&Rs? Harvey was the former president and member of the board of directors of a 92-unit condominium complex. The fourth floor of the complex included 23 units, each of which had adjacent to it attic space shown as unrestricted common area on the Condominium Plan. In response to a complaint, the board investigated the use of the attic spaces and found that 18 of the fourth floor owners were using 50 to 288 square feet for storage, and 10 were using in excess of 120 square feet. The CC&Rs authorized the board to permit an owner to exclusively use portions of the nonexclusive common area that were nominal in area and adjacent to the owner’s living unit if it did not unreasonably interfere with other owners’ use and enjoyment of the project. The association’s Architectural Review Committee found that the attic use was nominal and therefore permissible under the CC&Rs, but recommended a license agreement with the owners prohibiting further modifications or expanded use without association consent, and requiring a recorded license agreement to be paid for by the owner. The city inspected and found the use was appropriate for storage, but not living space. On further consideration, the board issued notices of violation to the fourth floor homeowners that the attic use violated the CC&Rs and the California Building Code. Facing legal opposition from the owners, the board prepared a standard “permission form” that limited the size of the storage area

to 120 square feet, permitted only “rough storage,” specified that the use was subject to the governing documents and law, and allowed the board to terminate its approval “for cause.” The board also obtained written confirmation that the attic use would not impair the association’s insurance coverage and required the fourth floor attic spaces to conform to Code. Subsequent city inspections found that no unit had storage exceeding 120 square feet and that all were in compliance with the Building and Fire Codes. The board also adopted a resolution in 2006 transferring to the fourth floor owners the exclusive right to use the attic space adjacent to the owner’s unit pursuant to Civil Code Section 1363.07(a)(3)(E). Harvey filed a suit against the association, certain members of the board and certain fourth floor residents alleging trespass, breach of fiduciary duty and injunctive relief.

The Court granted the defendants’ motion for summary judgment and awarded attorney’s fees against Harvey of almost $117,000. On Harvey’s appeal from the summary judgment in favor of the defendants, the Court made the following findings: A. The CC&Rs clearly empowered the board to manage the common area, to adopt reasonable rules consistent with the CC&Rs and to authorize an owner to exclusively use nominal portions of the common area adjacent to the owner’s unit that do not unreasonably interfere with any other owner’s use or enjoyment of the project; B. Under the authority of Lamden vs. La Jolla Shores Clubdominium Homeowners Association, 21 Cal. 4th 249 (1999), the trial court appropriately deferred to the authority and presumed expertise of the board Continued on page 20 ECHO Journal | February 2009

Statute and Case Law Update Continued from page 19

regarding its sole and exclusive right to maintain, control and manage the common areas when it granted the right of the fourth floor owners to use up to 120 square feet of inaccessible attic space common area for rough storage. The Appellate Court’s deference to the board’s decision was influenced by the board’s investigation of the actual use of the attic spaces, the duration of the use, the meeting with City officials concerning Building Code compliance, the consultation with an insurance broker, a “workshop” sponsored by the board with the homeowners, the permission form signed by the owner, the requirement of separate insurance, the board’s action to correct minor noncompliance items found in the course of the inspection, a special membership election to determine whether the board should permit homeowners to use the fourth floor attic spaces for rough storage, and the resolution adopted pursuant to Civil Code Section 1363.07(a)(3)(E). These actions demonstrated the board’s reasonable investigation and good faith action in the best interests of the association. The Appellate Court also upheld the trial court’s finding that the directors who lived on the fourth floor and voted in favor of the storage spaces did not have a conflict of interest. A disinterested majority of the board had approved the transactions, and the directors in question had no “material financial interest” as defined by Corporations Code Section 7233 when they voted in favor of allowing the spaces to be used for storage. Ritter & Ritter, Inc., et al. vs. The Churchill Condominium Association, 166 Cal.App.4th 103 (2008). What standard governs association maintenance decisions? Can an association be liable for neglected maintenance while the board of directors is not? Owners of condominiums in a 110-unit, 13-story condominium building brought suit against the association and its directors for failing to fireproof slab penetrations that permitted smoke and other odors to permeate adjacent units. The property was a condominium conversion and the unfilled Continued on page 22 20

February 2009 | ECHO Journal

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Statute and Case Law Update Continued from page 20

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2009 ECHO Community Association Statute Book Just Off The Presses This 80-page reference manual was mailed on January 16 to every person and business on the ECHO Journal mailing list. Most of you should have already received your copy. Additional copies are available for sale and may be ordered on the ECHO website or purchased at most ECHO events. Keep This Book At Hand For Ready Reference!

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penetrations were a code violation dating back to original construction. The ownersâ&#x20AC;&#x2122; expert engineer investigated and offered an opinion that the holes were a fire hazard and should be filled or fire stopped. The board hired its own professional engineer and ventilation system expert who agreed that the odor problem was caused, at least in part, by the slab penetrations and agreed that the slab penetrations posed a significant fire hazard. The board concluded, after a formal hearing, that these owners were obligated to fill the floor penetrations because they had remodeled their unit and imposed fines on the owners, agreeing to waive them if the holes were filled within 30 days after the order was made. Although the cost of repair was only $2,700 per unit, the owners filed suit against the association and the board of directors alleging nuisance, negligence, breach of fiduciary duty, breach of CC&Rs, breach of the covenant of good faith and fair dealing, permanent injunctions and declaratory relief. The association cross-complained to require the Ritters to fill the penetrations. A jury found for the unit owners and against the association for breach of the CC&Rs and breach of fiduciary duty, as well as negligence, but in favor of the directors. The Court issued an order that the association was to fire-stop and seal all of the slab penetrations adjacent to the two units owned by the plaintiffs. The Court did not order the association to fill all of the other slab penetrations, but it did require the association to bring the issue of the slab penetrations to the attention of the full membership and obtain their vote on the issue of a special assessment to fire-stop all slab penetrations. The Appellate Court refused to reverse the judgment against the association and in favor of the directors on the basis that the decisions were inconsistent. It ruled that the associationâ&#x20AC;&#x2122;s liability is separate and distinct from the personal liability of the directors. The Appellate Court held that the trial court was not required to defer to the boardâ&#x20AC;&#x2122;s good faith decision â&#x20AC;&#x153;whether to undertake building improvement projects,â&#x20AC;? stating that this was an unwarranted expansion of the â&#x20AC;&#x153;judicial deferenceâ&#x20AC;? theory. The Court distinguished the Lamden case as being restricted Continued on page 24

February 2009 | ECHO Journal

Statute and Case Law Update Continued from page 22

to “ordinary” decisions involving repair and maintenance actions that were clearly “within the board’s discretion under the development’s governing instruments.” It held that the Lamden rule of judicial deference provides protection from personal liability for the individual directors of a non-profit homeowners association, but the same rule of judicial deference will not automatically apply the association itself. This distinction is unsound because the Lamden decision only involved the liability of the homeowners association and not its individual directors. The condominium owners were awarded $531,159 of attorney’s fees, expert witness 24

February 2009 | ECHO Journal

fees and costs; the association and directors were denied their request for $775,000 in defense fees and costs, even though the individual directors were found to have no liability in the action. Using judicial sleight of hand, the Appellate Court ruled that although the individual directors were not found to have any liability, the owners were the prevailing parties entitling them to attorneys’ fees because the directors merely “avoided liability.” Treo vs. Kettner Homeowners Association, 166 Cal.App.4th 1055 (2008). Can the CC&Rs bind the association to a private judicial resolution of construction defect suits and waive the right to trial by jury?

The developer of this condominium project included a provision in the CC&Rs requiring all disputes between it and the association to be decided by a general reference pursuant to California Code of Civil Procedure Section 638. This statute permits the parties to a contract to agree that all disputes will be resolved outside of court using a private judge without the right to a jury trial. When the association filed suit for construction defects, the developer endeavored to enforce this clause. The developer succeeded in the trial court, but on appeal, the association prevailed in its argument that a CC&R clause is not a contract subject to Code of Civil Procedure Section 638. The Court relied on the earlier case of Villa Milano Homeowners

Assn. vs. Il Davorge, 84 Cal.App. 4th 819 (2000) that held that while CC&Rs can be construed as a contract between the association and its members, it does not suffice as a contract when the issue is waiver of the constitutional right to jury trial pursuant to Section 638. It noted that the right to trial by jury is founded in the California Constitution and that case law acknowledges the right as a fundamental one which may be waived only by a party receiving actual notice and an opportunity for reflection. Treating CC&Rs as a contract such that they are sufficient to waive the right to trial by jury does not comport with the importance of the right to a jury trial, the Court concluded, noting that

The right to trial by jury is founded in the California Constitution

CC&Rs are notoriously lengthy and are adhesion contracts written by developers, recorded before the owners buy, and cannot be modified by the association. Moreover, the CC&Rs are not signed by the association or its members. Ekstrom vs. Marquesa and Monarch Beach Homeowners Association, 168 Cal.App. 4th 1111 (2008). What is the scope of discretion of a board in the enforcement of CC&Rs? This common interest development was comprised of single-family homes, many of which had ocean views. The CC&Rs required that trees, hedges and other plant materials be trimmed by owners so that they do not exceed the height of the house, unless the trees would not obstruct the view from any other lots, as determined by the Architectural Review Committee. Owners of ocean view lots sued the association when it failed to enforce the CC&Rs against a number of owners who had planted palm trees. The board, some of whom owned lots with palm trees, endeavored to avoid liability by adopting a

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2009 2:35:17 25 ECHO Journal | February 4/23/08 PM

Directory

UPDATES Updates for listings in the 2008 ECHO Directory of Businesses and Professionals.

Additions to Member Listings Bank of San Francisco 575 Market St., #2400 San Francisco, CA 94105 Contact: Ike Ogata Tel: 415-744-6703 Fax: 415-744-6717 www.bankofsf.com Email: ike.ogata@bankofsf.com

Changes to Member Listings Franciscan Property Management 441 Waverley St. Palo Alto, CA 94301-1719 Tel. remains the same

February 2009 | ECHO Journal

Statute and Case Law Update Continued from page 25

rule that exempted palm trees from the CC&R restriction. The board also attempted unsuccessfully to amend the CC&Rs to exempt palm trees. After the lawsuit was filed, the board adopted new rules defining a “view” in limited terms, so that it would not apply to the palm tree obstruction and prohibited removal of palm trees planted before adoption of the rule. The trial court found for the view lot plaintiffs, concluding that the CC&Rs were clear and rejected the argument that the CC&Rs gave the Architectural Review Committee discretion to allow palm trees. The Court found that the association had not waived, and was not estopped, to enforce the CC&Rs by having approved landscape plans or failed to enforce the CC&Rs in the past. The Appellate Court rejected the argument that the business judgment rule in Lamden applied. That principle of judicial deference to community association board decision making is limited to cases where owners seek to litigate ordinary maintenance decisions entrusted to their discretion. The Appellate Court found that the CC&Rs clearly prohibited view obstruction by any vegetation, including trees, and that the association could not exclude an entire species of tree from the operation of CC&Rs. The Court also held that it was not obligated to defer to the board’s rules concerning palm trees because they were in direct conflict with the CC&Rs. The board also could not define the term “view” in the CC&Rs in a manner to render it meaningless. These facts contrast with the situation in Harvey where the board had the specific power to adopt rules and regulations regarding storage in the common area under its general authority to manage the common area and authorize owners to use exclusively portions of the common area that were “nominally common area.” Crestmar Owners Association vs. Stapakis, 157 Cal.App.4th 1223 (2008). What is the statute of limitations to quiet title to a portion of the common area? A developer converted a building into condominiums in 1977 and the association assumed management of the common area. The CC&Rs required the developer to transfer parking spaces in the building’s garage to

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February 2009 | ECHO Journal

By David H. Levy, CPA

2008 Survey of Community Association Financial Statements CHO and the firm of Levy, Erlanger & Company, CPAs (LEC) completed a financial survey of approximately 1,500 Northern California community associations in late 2008. The associations included large and small developments, urban and rural projects, newer and older associations, managed and self-managed developments, etc. The survey included actual financial statements (either CPA- or management-prepared), not budgets, for fiscal years ended May 31, 2007 through April 30, 2008. The financial data summarized included both balance sheet (assets and liabilitiesâ&#x20AC;&#x201D;an indication of financial strength) and income statement (revenues and expensesâ&#x20AC;&#x201D;indicators of financial performance) accounts. The surveyed associations were not statistically selected but were generally drawn from the client list of Levy, Erlanger and from information supplied by several financial management-only firms. Due to the nonstatistical nature

ECHO Journal | February 2009

of the survey, the summarized results will not be indicative of the financial strength (equity) or profitability (net income) of any particular association, but they will give an indication of what is “average” for the associations included in any particular subgrouping of the survey.

Survey results are indicative of what is average for associations in California. Demographics of Surveyed Associations For all community associations in the state, approximately 2% are very large, 11% are large, 22% are medium and 65% are small. These statewide averages (and those disclosed below) are from the “2008 California Community Association Statistics” book published annually by LEC based on their statewide community association database of approximately 46,000 California common interest developments. Accordingly, the financial survey sample is roughly in proportion to statewide averages. Size

Alameda county

292

Contra Costa county

167

Marin county

(2%)

Large (151 to 500 units)

207

(14%)

Medium (51 to 150 units)

487

(33%)

Small (2 to 50 units)

752

(51%)

(<1%)

Unknown

On a statewide basis, approximately 66% of community associations are old, 17% are middle-aged, and 17% are young. Again, the financial survey sample is roughly in proportion to statewide averages.

319

San Mateo county

162

Santa Clara county

255

Solano county

Sonoma county

Other counties

117

On a statewide basis, approximately 67% of all community associations are condominiums, condominium conversions and housing cooperatives, and approximately 33% are planned unit developments. Hence, the financial survey sample is reflective of statewide averages. Legal Entity Condominiums, conversions, COOPs

913 (62%)

Planned unit developments (PUDs)

565 (38%)

Old (16+ years old)

752

(51%)

Middle-age (6–15 years old)

496

(33%)

Young (1–5 years old)

232

(16%)

Unknown age

On a statewide basis, approximately 67% of all community associations are located in the 13 southern-most California counties. Since none of the surveyed developments are in Southern California this survey is not proportionately representative with respect to the location variable. February 2009 | ECHO Journal

On a statewide basis, approximately half of all community associations are professionally managed (i.e., off-site management company), and approximately half are self-managed. Self-managed, board-only managed projects tend to be smaller (under 30 units) while self-managed, with on-site manager, projects tend to be larger (over 300 units). Accordingly, this survey is not proportionately representative with respect to the management variable. Management Type Off-site management company

Age

San Francisco county

Other and unknown legal entities

Very large (501+ units)

Location

Self-managed

associations (2–50 units) average cash jumped from $3,400 per unit in 1995 to $10,900 per unit in 2008. The change was much less dramatic for medium and large associations. Financial Strength Average Avg. per Unit Cash, excluding litigation funds Assessments Receivable

$313,000

$3,200

$26,000

$270

Reserve Obligation (71 associations)

$265,000

In the 1995 survey, the average assessment receivable balance for small associations was $580 per unit, while in 2008 it averaged $910 unit. Average assessments per unit and overall changes from 1995 to 2008 were generally smaller for medium and large-sized associations. In the 1995 survey, the average reserve obligation for 58 associations was $117,000. Given the aging of associations, and the inflation of major repair and replacement costs, the increase of 125% over 13 years is not surprising. Financial Performance—Income Annual Avg. PUPM Regular Assessments

Assessments, Operating Assessments, Reserves

$203,000 $177 (73%) $83,000

$67 (27%)

Total Regular Assessments

$286,000 $244

Special Assessments

$150,000 $154

(214 associations) 1,465

(98%)

(2%)

Survey Financial Results All surveyed associations (1,498 consisting of 142,581 units; not all associations are included in each line of the following survey results): In a 1995 survey of 929 Northern California associations representing 125,326 units, the average cash and investment balance, excluding litigation settlement funds, was approximately $220,000 or $2,900 per unit. Hence, the per unit increase over a 13year period is only about 10%. Among small

Other Income Lawsuit Settlements (16 associations) Interest Income (1,321 associations)

$675,000 $581 $10,000

2.9% avg. rate on cash

In the 1995 survey, operating assessments represented 74% of total assessments while reserve assessments represented 26% of total assessments—a negligible change from the 2008 survey results. From 1995 to 2008, on average, the assessments of small associations increased, percentage wise, more than those of medium and large associations. Small association regular assessments increased from

$82,000 per year or $261 PUPM in 1995 to $234,000 per year or $823 per unit in 2008. Reserve contribution increases for small associations was even more marked—from $19,000 per year or $50 PUPM in 1995 to $69,000 per year or $228 PUPM in 2008. The foregoing results are based on a sample size of 373 small associations (11,048 units) in 1995 and 752 small associations (17,271 units) in 2008. Newer associations (232 projects) had average regular assessments of $246,000 per year ($181 PUPM), middle-aged associations (496 projects) averaged $276,000 per year ($298 PUPM), and older associations (752 projects) averaged $307,000 per year ($237 PUPM). Similar data from the 1995 survey was $154,000 ($174 PUPM) for newer associations (110 projects), $177,000 ($192 PUPM) for middle-aged associations (450 projects), and $318,000 ($213 PUPM) for older associations (335 projects). In the 1995 survey, 159 associations, 17% of those surveyed, had average special assessments of $142,000 or $150 PUPM. In 2008 roughly the same percentage of surveyed associations, 14%, experienced roughly the same average special assessments. Newer associations (30 projects) had average special assessments of $69,000 ($44 PUPM), middle-aged associations (65 projects) averaged $101,000 ($123 PUPM), and older associations (116 projects) averaged $201,000 ($216 PUPM). Similar data from the 1995 survey revealed $15,000 ($25 PUPM) for newer associations (11 projects), $214,000 ($206 PUPM) for middle-aged associations (70 projects), and $96,000 ($105 PUPM) for older associations (74 projects). In the 1995 financial survey, the average interest earnings rate was 3.6%. In the 1995 financial survey, insurance, excluding earthquake, averaged $17,500 or $27 PUPM, and, for earthquake coverage only, $30,000 average (23 associations). 2008 insurance expense (excluding earthquake) may be slightly overstated due to some associations not disclosing earthquake coverage. Management averaged $22,000 in 1995 or $21 PUPM. Bad debt expense was not sufficiently prevalent in 1995 to warrant separate disclosure. In 1995, Management by association size was $22 PUPM for small (2–50 units, 332 projects), $16 PUPM for medium (51–150 units, 346 projects), and $13 PUPM for large (151–500 units, 156 projects) associations.

In the 1995 financial survey, total common area utilities averaged $52,000 per year or $53 PUPM.

Financial Performance—Expenses Administration

Average

PUPM

Insurance (excluding earthquake)

$28,000

$25

Insurance, Earthquake (7 associations)

$32,000

Management

$19,000

$17

Bad Debt (323 associations)

$13,000

$10 PURA

Financial Performance—Expenses Utilities

Similar data for 2008 was $64 PUPM for small (2–50 units, 697 projects, including several high-rise urban condos), $20 PUPM for medium (51–150 units, 454 projects), and $7 PUPM for large (151–500 units, 188 projects). Management expense, broken down by type of development, was $20 PUPM for condominiums (477 projects) and $13 PUPM for planned unit developments (322 projects) in 1995. Similar data for 2008 was $21 PUPM for condominiums (848 projects) and $13 PUPM for PUDs (519 projects). In the 1995 financial survey, general maintenance averaged $24,000 or $40 PUPM. Security and concierge (262 associations) averaged $25,000 or $92 PUPM. Landscape maintenance averaged $28,000 or $30 PUPM. Elevator maintenance was not separately tabulated in the 2008 survey. Pool and spa expenses (468 associations) averaged $7,000 or $7 PUPM—virtually unchanged 13 years later in the present survey. Newer associations had average maintenance expenditures of $77,000 per year (228 associations), middle-age associations averaged $77,000 per year (489 associations) and older associations averaged $91,000 per year (741 associations). Similar data from the 1995 survey was $42,000 for newer (111) associations, $49,000 for middle (461) associations and $71,000 for older (340) associations.

Average

PUPM

Gas and Electricity

$23,000

$21

Water and Sewer

$21,000

$19

Garbage Collection

$18,000

$17

Total

$62,000

$57

Not surprisingly, major repairs and replacements have increased markedly due to the aging of community associations. The effect of increasing petroleum prices is evident in the doubling of average paving costs from 1995 to 2008. Even more striking, average painting cost has tripled over this same period. Newer associations had average major repair expenditures of $86,000 per year (148 associations), middle-age associations averaged $94,000 per year (356 associations), and older associations averaged $108,000 per year (549 associations). Similar data from the 1995 survey was $8000 for newer associations, $49,00 for middle-aged associations and $76,000 for older associations. Financial Performance—Expenses 2008 Survey Major Repairs

Average

PUPM

Roofing (138 associations)

$65,000

$81

Painting (150 associations)

$94,000

$58

Paving (115 associations)

$31,000

$26

Overall

$99,000

1995 Survey Financial Performance—Expenses Maintenance

Average

PUPM

General maintenance

$50,000

$45

Security and concierge (207 associations)

$50,000

$38

Landscaping

$26,000

$21

Elevator maintenance (295 associations)

$11,000

$13

$8,000

Pool and spa (469 associations)

Roofing (136 associations)

$52,000

$39

Painting (122 associations)

$21,000

$22

Paving (84 associations)

$16,000

Overall

$54,000

Continued on page 39 ECHO Journal | February 2009

Learn How Your Association Can Successfully Meet Todayâ&#x20AC;&#x2122;s Challenges Tackle the tough issues facing associations at the Spring 2008 ECHO

Registration Fee: $40 Members $50 Non-Members

San Francisco Seminar April 4, 2009 The Firehouse, Fort Mason Center San Francisco Seminar Agenda 8:00 8:45 9:00 9:45 10:30 10:50 11:35 12:20 12:50 1:00

Registration and Sponsor Tables Welcome and Introductions Collections, Bankruptcies and Foreclosures Case and Statutory Law Update Break Dealing With Ineffective Boards Improving the Routine Reserve Study Questions and Answers Drawings for Sponsor Prizes Adjourn

Yes, reserve _____ spaces for the San Francisco Seminar. Amount enclosed: $__________ (attach additional names) Name: ______________________________________________________ HOA or Firm: ________________________________________________ Address: ____________________________________________________ City: __________________________ State: _____ Zip: ____________ Phone: ______________________________________________________ Visa/Mastercard No. _____________________ Exp. Date: ________ Signature: ___________________________________________________ Orders will not be processed without payment in full. Fees for cancelled registrations will not be refunded. Return with payment to: ECHO, 1602 The Alameda, STE 101, San Jose, CA 95126 Telephone: 408-297-3246; Fax: 408-297-3517

News from ECHO

Times Are Tough The economic crisis facing our country today is impacting everyone. Given the size of the crisis, countless individuals and companies nationwide, including homeowner associations, are forced to make difficult decisions. But there is a silver lining to a crisis like this. It forces all to consider options they would not otherwise consider and to get creative. As the crisis has grown, a number of creative solutions have been implemented to help associations get more from less in their day-to-day business. The first area naturally affected by the crisis is collections. Homeowners in droves are feeling the economic pinch and falling behind on their association dues. One option associations are using is hiring a law firm that implements alternative billing practices, like contingency fee arrangements. Under this arrangement, the association pays the attorney a percentage of the dollars collected. The advantage is the association does not have to advance any legal fees to recoup the debt.

A second option that is getting more attention is selling or assigning the association’s liens or accounts receivable. Here, the association sells the lien to an investor, who may then choose to pursue collection or not; but regardless, the association receives all or some of the outstanding balance immediately. A third solution to the collection dilemma is implementing foreclosure. There are several factors when considering this option that will not be discussed here. Suffice to say, however, that this can be effective. Another solution some associations are using is an offer of amnesty to delinquent homeowners. Here, the homeowners are offered a certain period of time to become current on the principal amount owed to the association. If a homeowner pays the principal amount owed, the association agrees to waive any late fees, fines, attorney fees and interest on the account. A second area that has been impacted by the economy is the interaction between associations and vendors. Many vendors are becoming more aggressive in their billing practices and collections. A third area that is being impacted is community maintenance. With the revenue stream impeded, associations are often forced to reconsider maintenance projects, including daily maintenance. For example, associations are holding back from starting large-scale projects such as installing a new roof and in some cases even considering shutting down amenities like clubhouses, pools and the like.

Another solution associations are implementing in this situation is obtaining short-term loans. The loans can be used to help the association get through the economic crunch and avoid a logjam of deferred maintenance. Granted, the loan will have to be repaid, but this can be spread out over five to ten years, which gives the association time to absorb the expense. A fourth area where associations are seeing an impact on their communities is an increase in the number of rented units. As homes become more difficult to sell, owners are turning them into rental property. Thus, many associations are inquiring about their ability to limit the number of rental units in the community and, in a few cases, taking steps to do so. While many of these solutions have helped associations cope with the current economic times, associations should be cautious of “creative solutions” that could end up costing more money in the long run or affecting owners’ legal rights. For example, in the spirit of cutting costs, associations may decide to cut back on various services like management, legal, or accounting, and to attempt to take care of these items “in-house.” This approach is frequently risky because it often results in tasks being improperly completed or not completed at all. Ultimately such occurrences can increase the likelihood of a future dispute that will cost the association money in the long run. These risks should be avoided, even in today’s economic climate. In general, associations should have

their attorney look at creative solutions before they are initiated. Every association is different with different needs, but the solutions discussed in this article have proven to be effective for many complexes during this time. Inevitably, some of these solutions will become commonplace as a more efficient and effective means to do business, which is one of the silver linings we can take from this challenging time—a new and improved association.

Important Upcoming Events Saturday, February 21 Central Coast Winter Seminar 7:30 a.m. to 1:30 p.m. Best Western Seacliff Inn, Aptos Saturday, March 21 North Counties Seminar 8:00 a.m. to 1:00 p.m. Community Center, Rohnert Park Thursday, March 26 San Francisco Luncheon 11:45 a.m. to 2:00 p.m. St. Francis Yacht Club, San Francisco Saturday, April 4 San Francisco Spring Seminar 7:30 a.m. to 1:00 p.m. Fort Mason Center, The Firehouse, San Francisco ECHO Journal | February 2009

2008 ECHO Business & Professional Directory $20.00 Non-Member Price: $25.00

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This well-known compact guide for operation of common interest developments in California now includes a comprehensive index of the book and a chapter containing more than 200 frequently-asked questions about associations, along with succinct answers.

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Yes! Place my order for the items above. Board Memberâ&#x20AC;&#x2122;s Guide for Management Interviews $20.00 Non-Member Price: $25.00 This guide for use by boards for conducting complete and effective interviews with prospective managers takes the guesswork out of the interview process. Over 80 questions covering every management duty and includes answer sheets matched to the questions.

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Calendar of Events

Make a note of these dates! Wednesday, February 4 Maintenance Resource Panel 12:00 Noon ECHO Office 1602 The Alameda, Ste. 101 San Jose Wednesday, February 11 South Bay Resource Panel 12:00 Noon Il Fornaio 302 Market St., San Jose Friday, February 13 East Bay Resource Panel 9:30 a.m. Christison Company 3090 Independence Dr., #100, Livermore

Thursday, March 5 North Bay Resource Panel 9:30 a.m. Contempo Marin Clubhouse 400 Yosemite Rd., San Rafael Monday, March 9 Accountants Resource Panel 6:00 p.m. Francesco’s Restaurant, Oakland Tuesday, March 10 Central Coast Resource Panel 12:00 Noon Pasatiempo Inn, Santa Cruz

Friday, March 13 East Bay Resource Panel 9:30 a.m. Wednesday, February 18 Angius & Terry Wine Country Resource Panel 1900 N. California Blvd., 11:45 a.m. Suite 950, Walnut Creek Eugene Burger Mgmt Co. Wednesday, March 18 6600 Hunter Dr., Rohnert Park Wine Country Resource Panel Saturday, February 21 11:45 a.m. Central Coast Winter Eugene Burger Mgmt. Co. Seminar 6600 Hunter Dr., Rohnert Park 7:30 a.m. to 1:30 p.m. Saturday, March 21 Best Western Seacliff Inn North Counties Seminar 7500 Old Dominion Ct., Aptos 8:00 a.m. to 1:00 p.m. Rohnert Park Community Center 5401 Snyder Ln., Rohnert Park

Thursday, March 26 San Francisco Luncheon 11:45 a.m. to 2:00 p.m. St. Francis Yacht Club San Francisco Wednesday, April 1 Maintenance Resource Panel 12:00 Noon ECHO Office 1602 The Alameda, Ste. 101 San Jose Saturday, April 4 San Francisco Spring Seminar 7:30 a.m. to 1:00 p.m. Fort Mason Center, The Firehouse, San Francisco

Saturday, April 25 South Bay Spring Seminar 7:30 a.m. to 1:00 p.m. Campbell Community Center Roosevelt Room 1 W. Campbell Ave., Campbell Saturday, June 13 ECHO Annual Seminar Santa Clara Convention Center Santa Clara

Friday, April 10 East Bay Resource Panel 9:30 a.m. Christison Company 3090 Independence Dr., #100, Livermore Wednesday, April 15 Wine Country Resource Panel 11:45 a.m. Eugene Burger Mgmt. Co. 6600 Hunter Dr., Rohnert Park

Regularly Scheduled Resource Panel Meetings Resource Panel Maintenance North Bay East Bay East Bay Accountants Central Coast South Bay Wine Country Legal 36

February 2009 | ECHO Journal

Meeting

Location

First Wednesday, Even Months First Thursday, Odd Months Second Friday, Odd Months

ECHO Office, San Jose Contempo Marin Clubhouse, San Rafael Angius & Terry, Walnut Creek

Second Friday, Even Months Second Monday, Odd Months Second Tuesday, Odd Months Second Wednesday, Even Months Third Wednesday, Monthly Quarterly

Christison Company, Livermore Francesco’s Restaurant, Oakland Pasatiempo Inn, Santa Cruz Il Fornaio Restaurant, San Jose Eugene Burger Management Co., Rohnert Park Varies

Statute and Case Law Update Continued from page 27

anyone who bought a condominium, and, if any condominiums remained unsold after three years from the first sale, the developer was to convey all remaining unassigned parking spaces to the association. The developer failed to transfer two unsold parking spaces to the association and, approximately 20 years later, conveyed those spaces to its (the developer’s) president and sole shareholder and demanded the association pay back rent for the use of the spaces during that time. The association filed suit to quiet title to the spaces and was successful in the trial court. On appeal, the owner contended that the association did not pursue its complaint in a timely manner, being four years from the breach under Code of Civil Procedure Section 337. The trial court had found that the statute of limitations on the association’s claim did not begin to run until the association made a demand for performance, which was in the four year window, relying on Cutujian v. Benedict Hills Estates Assn., 41 Cal 4th 1379 (1996). The Appellate Court held that the Cutujian case did not apply because the delayed accrual theory in that case was dependent upon a covenant not tied to a precise time, in contrast to the three year clause in the Crestmar CC&Rs. However, the Court found that the complaint was timely because the statute of limitations for an action to quiet title does not begin to run until someone presses an adverse claim against the person holding the property. Pacific Hills Homeowners Association vs. Prun, 160 Cal.App. 4th 1557 (2008). What statute of limitations applies to an association’s enforcement of architectural restrictions? How do the equitable defenses of waiver and laches apply? The Pruns owned a home in a planned development subject to CC&Rs. The CC&Rs prohibited the construction of a “fence or wall” without prior approval of the Architectural Committee. The association’s architectural guidelines limited the height of fences to six feet unless they were within twenty feet of the front property line, in which case the maximum height was three feet. In late 2000, the Pruns constructed a mechanical gate connected to a fence and pilasters across their driveway without permission from the association. They then

Find the Answers to your Questions on Condo Ownership

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Continued on page 39 ECHO Journal | February 2009

Honor Roll

About

ECHO Honors Volunteers Mike Muilenburg 2008 Volunteer of the Year ECHO Resource Panels Accountant Panel Richard Schnieder, CPA 707-576-7070 Central Coast Panel Jim Harmon 831-425-3622 East Bay Panel Scott Burke, 408-536-0420 Mandi Begley, 925-937-0434 Legal Panel Mark Wleklinski, Esq. 925-691-1191 Maintenance Panel Brian Seifert, 408-536-0420 North Bay Panel Diane Kay, CCAM, 415-846-7579 Stephany Charles, CCAM 415-458-3537 San Francisco Panel Jeff Saarman, 415-749-2700 South Bay Panel Geri Kennedy, CCAM 650-348-2691 ext. 1006 Kimberly Payne, 408-200-8470 Wine Country Panel Maria Birch, 707-584-5123

Legislative Committee Paul Atkins Jeffrey Barnett, Esq. Sandra Bonato, Esq. Jerry L. Bowles Joelyn Carr-Fingerle, CPA John Garvic, Esq., Chair Geri Kennedy, CCAM Wanden Treanor, Esq. 38

February 2009 | ECHO Journal

SF Luncheon Speakers John Allanson Tyler P. Berding, Esq. Ronald Block, PhD. Doug Christison, PCAM, CCAM Karen Conlon, CCAM Rolf Crocker, CCAM Ross Feinberg, Esq. David Feingold, Esq. Tom Fier, Esq. Kevin Frederick, Esq. John Garvic, Esq. Beth Grimm, Esq. Brian Hebert, Esq. Roy Helsing Stephen Johnson, CFP Julia Lave Johnston Garth Leone Nico March Kerry Mazzoni Larry Russell, Esq. Steve Saarman Nathaniel Sterling, Esq. Debra Warren, PCAM, CCAM Steven Weil, Esq. Mark Wleklinski, Esq. Glenn Youngling, Esq.

Central Coast Fall Seminar Speakers David Feingold, Esq. Beth Grimm, Esq. Glenn Youngling, Esq.

Association Finances Seminar Speakers Joelyn Carr-Fingerle, CPA Bill Erlanger, CPA James Ernst, CPA John Garvic, CPA Donald Haney, CPA

Peninsula Fall Seminar Speakers Jeffrey Barnett, Esq. Tyler Berding, Esq. Robert Hall, Esq. David Kuivanen Karl Lofthouse Steven Saarman Chris Sigler

Recent ECHO Journal Contributing Authors October 2008 Tyler P. Berding, Esq. Paul Collins, PCAM, CCAM John Paul Hanna, Esq. Jan A. Kopczynski, Esq. Larry J. Pothast, PCAM, CCAM David Van Atta, Esq. November 2008 Derek Eckert Tom Fier, Esq. Kerrington Fier Mike Muilenburg Andrea L. O’Toole, Esq. Steven S. Weil, Esq. December 2008 Tyler P. Berding, Esq. David West Paul W. Windust, Esq. January 2009 Tyler P. Berding, Esq. Joelyn K. Carr-Fingerle, CPA Jeanette Catellier, PCAM Jan A. Kopczynski, Esq. Alfred D. McKelvy

ECHO

What is ECHO? ECHO (Executive Council of Homeowners) is a California non-profit corporation dedicated to assisting community associations. ECHO is an owners’ organization. Founded in San Jose in 1972 with a nucleus of five owner associations, ECHO membership is now 1,525 association members representing over 150,000 homes and 325 business and professional members.

Who Should Join ECHO? If your association manages condominiums or a planned development, it can become a member of ECHO and receive all of the benefits designated for homeowner associations. If your company wants to reach decision makers at over 1,525 homeowner associations, you can become an associate member and join 325 other firms serving this important membership.

What are the Benefits of ECHO Membership? • Subscription to monthly magazine for every board member • Yearly copy of the Association Statute Book for every board member • Frequent educational seminars • Special prices for CID publications • Legislative advocacy in Sacramento

ECHO Membership Dues HOA Size 2 to 25 units 26 to 50 units 51 to 100 units 101 to 150 units 151 to 200 units 201 or more units Business/Professional

Rate $120 $165 $240 $315 $390 $495 $425

ECHO Journal Subscription Rates Members $50 Non-members/Homeowners $75 $125 Businesses & Professionals

How Do You Join ECHO? Over 1,800 members benefit each year from their membership in ECHO. Find out what they’ve known for years by joining ECHO today. To apply for membership, call ECHO at 408-297-3246 or visit the ECHO web site (echo-ca.org) to obtain an application form and for more information.

Statute and Case Law Update Continued from page 37

submitted plans after construction, which were denied by the association. The association sent demand letters and threatened fines in 2001. In 2002, the City of Mission Viejo sent a letter to the Pruns that their gate violated the city setback requirements. In 2002, 2003 and 2004, the association sent further demand letters. A suit was filed in 2005. The trial court ruled for the association, finding that the five year statute of limitations in CCP Section 336(b) applied and concluded that the defendant had not proven the affirmative equitable defenses of estoppel, laches or waiver. The court ordered that the defendants lower their fence, gate and pilasters to a maximum of three feet or set them back at least twenty feet from the property line, in which case they could be of a height up to six feet. The court ruled that, if they chose to relocate the fence and gate, that the association would be required to pay two-thirds of the cost of relocation.

The clear language and intent of the CC&Rs cannot be avoided through contrived rules. On appeal, the trial court’s ruling that the five-year statute of limitations of CCP Section 336(b) was found to be correct, even though the architectural standards were not recorded. That statute imposes a five year statute of limitations for an action for violation of a restriction as defined in Civil Code Section 784, which is a limitation on, or provision affecting, the use of real property in a deed, declaration or other instrument. The association was found to have delayed in enforcing the setback restriction, which was not condoned by the court, but was found not to give rise to a defense of waiver or laches because the defendants could not show prejudice. They began constructing the

gate before they submitted an application for approval. The Court likewise found that the association had not waived its right to enforce the architectural guidelines. The Pruns produced evidence in the litigation that their neighbors had obtained the association’s approval to build pilasters within the twentyfoot setback area and had constructed them to six-foot height in violation of the guidelines. The association proved that it was unaware of the violation until the pendency of the litigation, but then it made demand on the neighbors to modify the pilasters to conform to the guidelines and also determined, in apparent reliance on its consulting architect and engineer, that the neighbor’s pilasters were only a minor obstruction and not as dangerous as the defendant’s construction, which was found to be a safety hazard. Therefore, the defendants did not prove that the restriction was being enforced in an arbitrary or capricious manner. Conclusions Taken together, these key appellate decisions in 2008 establish a road map for association success in disputes with members relating to the interpretation and enforcement of CC&Rs. The clear language and intent of the CC&Rs cannot be avoided through contrived rules. Instead, changes to controversial CC&R clauses should be submitted to the members for voting approval. When acting on controversial issues, the board should consider advice from legal counsel, insurance agents, engineers and other appropriately qualified experts. The board also should consider calling meetings of the members to discuss the issues and alternatives. The position of the “government agencies” should be sought in appropriate cases. Alternatives should be considered together with conditions of approval. And finally, where human safety is involved, and the cost of repair is not significant, the association should give serious consideration to acting, even if its legal responsibility may be uncertain.

Jeffrey A. Barnett is an association attorney with legal offices in San Jose. He is a past member of ECHO’s Board of Directors and a current member the Legal Resource Panel, the Legislative Committee and several regional resource panels.

Financial Statements Continued from page 31

Acknowledgements The generous assistance of the financial management-only companies listed below is gratefully acknowledged. Space does not permit the listing of the approximately 150 fullservice management companies that also contributed financial data but their participation is also gratefully acknowledged. • Account Management Solutions • Community Association Financial • Community Financial Management, Inc • HOA Accounting Services • NA Shade & Associates

David Levy is a partner at Levy, Erlanger & Company, CPAs, in San Francisco. He is the treasurer of the ECHO board of directors and a frequent speaker at ECHO seminars. ECHO Journal | February 2009

ECHO Central Coast Winter Seminar: Survival tools for associations Don’t miss this opportunity to stay informed on how you and your association can survive the economic and legal climate in 2009. Seminar Agenda: Surviving in 2009

Central Coast Winter Seminar Saturday, February 21, 2009 8:00 a.m. to 1:00 p.m.