Journal_10_07

July 2010

A Journal for California Community Association Leaders

echo-ca.org

ALSO INSIDE THIS ISSUE:

• Mid-2010 Legislative Update • The Disclosure Trap—Part 2 • Insurance Survival Kit Change Service Requested ECHO 1602 The Alameda STE 101 San Jose, CA 95126

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Contents The Disclosure Trap —page 20

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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.

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How “As Is” Really Isn’t How It Is Attorney Matt Malone discusses the legal effect of “as-is” clauses in defect claims. If your association is facing such a defect claim, you are ill advised simply to walk away without first consulting counsel to guide you through the challenges you might raise.

You may find that it is not always clear what the meaning of “as is” actually is.

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Office Hours: Monday–Friday 9:00 a.m. to 5:00 p.m.

An Association Insurance Survival Kit Insuring a development involves elements similar to a survival kit. Just as you would pack a survival kit for you and your family, a community must also prepare for a loss by obtaining essential insurance coverage. In this article, learn about the coverage necessary to insure an HOA and at the very least know how to pack a survival kit.

29 Legislation at a Glimpse 30 Directory Updates 34 ECHO Bookstore 36 Events Calendar 38 ECHO Volunteers 40 Letters to the Editor 41 ECHO Marketplace 41 Advertiser Index

On the Cover How “As Is” Really Isn’t How It Is —page 6 July 2010 | ECHO Journal

Executive Council of Homeowners, Inc.

The Disclosure Trap—Part 2

28 News from ECHO

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

Bills of significant interest to association members and professionals in this legislative session, along with their current status, are discussed.

Departments

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Copyright 2010 Executive Council of Homeowners, Inc. All rights reserved.

Reproduction, except by written permission of ECHO, is prohibited.

1602 The Alameda, Suite 101 San Jose, CA 95126 408-297-3246 Fax: 408-297-3517 www.echo-ca.org info@echo-ca.org

Mid-2010 Legislative Update

When we last left Sally, she was trying to figure a way out of certain disaster. About 2 years ago, Sally convinced the board to approve a competent inspection of the property. The engineer found damage that would cost $3,000,000. Since then there has been not one piece of good news in this sordid saga. Read on to see what has happened.

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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.

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

Jerry L. Bowles David Levy Kurtis Shenefiel Wanden Treanor

Executive Director Oliver Burford Communications Coordinator Tyler Coffin Legislative Consultant Government Strategies, Inc. Design and Production George O’Hanlon ECHO Mission Statement 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.

2010 ECHO Volunteer of the Year

DIANE KAY Diane Kay has been named as the ECHO Volunteer of the Year for 2010 by the ECHO board of directors. This award recognizes the outstanding service and support she has contributed in advancing ECHO’s objectives and influence.

Diane opened Kay Star Property Services five years ago, after twenty-five years working as a portfolio manager for other management companies. She has been an active participant in ECHO activities during her entire career. Diane has contributed to the ECHO Journal, made presentations at the ECHO seminars and has been a volunteer at many ECHO events.

She was a founding member of the ECHO North Bay Resource Panel and continues to

make important contributions to the activities of that group. She has served several terms as the panel chair and is currently the co-chair of the group.

After moving from Connecticut to San Francisco with her family in 1975, Diane began her career in property management with Coldwell Banker. Diane has been a CACM Certified Community Association Manager since 1992.

Diane lives in Novato and spends most of her free time with her grandchild, Amy. Otherwise, you will find her working in the community vegetable garden, volunteering or holding weekly Sunday dinners for her family and close friends.

ECHO Journal | July 2010

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July 2010 | ECHO Journal

“It depends on what the meaning of the word ‘is’ is.”

—President Bill Clinton, August 1998

By Matt Malone, Esq.

How “As Is” Really Isn’t How It Is ET’S BE HONEST: The only people young enough not to recall that quote from our 42nd President are also far too young to be reading this article. Support him or not, we all remember that gem from his videotaped grand jury testimony. And we also remember the backlash that followed: Could such a seemingly simple word like “is” be stretched into something debatable, questionable or somehow indefinable?

L

Now, residential purchase and sale agreements are not quite as, shall we say, sexy as a presidential scandal. But in this case, they do implicate a similar problem. Almost all such agreements contain disclaimers and warranty waivers whereby a buyer acknowledges that he or she takes the property without representations by the seller as to the fitness of any particular component. Similarly, these agreements almost universally contain

ECHO Journal | July 2010

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“as is” provisions, which act as a confirmation that the buyer takes the property in its presently-existing condition. But, as this article will show, “as-is” clauses and related waivers do not stop claims by all purchasers and do not necessarily apply to all claims a particular plaintiff might have—especially if that plaintiff is a homeowner association. In short, it is not as simple as you might think to determine what the meaning of “as is” is.

So, when might “as is” not be the way it is?

The first section of this article describes California law on “as is” clauses, illustrating the reluctance by both the legislature and the courts to allow such provisions to operate as catch-alls universally protecting sellers from any problems a buyer might later discover with the property. In the second section, we will look at the particular problem of homeowner association defect claims. We will see how as-is clauses do not block such actions because the association never executed the contract containing the “as-is” provision. Indeed, even if the clause appeared in every purchase and sale contract signed by the members of an association, it is not enough to show that the association, which is its own separate, distinct legal entity, waived any of its claims. Finally, we will turn to the unique issue of condominium conversions— older properties that are nonetheless governed by new associations—to see whether a homeowner association is on weaker ground with the “as-is” clause because the conversion is, unquestionably, not new construction.

What The Law Says “As Is” Is: The “Visible Or Observable” Rule and Seller Disclosure Requirements Over the past several decades, both the legislature and the courts have grappled with the meaning and effect of “as-is” provisions in California. As it stands now, the law is this: An “as-is” clause protects a seller from postsale claims by the buyer as to conditions that the buyer could view or observe. It does not protect sellers where they either actively or passively conceal known problems with the property that might affect its value, or otherwise fail to meet the disclosure obligations set forth in the Civil Code.

An “as-is” provision “means that the buyer takes the property in the condition visible or observable by him.”1 It does not impose upon the buyer any additional obligation to conduct independent investigations as to the

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July 2010 | ECHO Journal

state of the property.2 Of course, this does not give the buyer carte blanche to sue for anything he or she happened not to see. If a matter was obvious or could have been discovered through reasonable diligence, such as a standard termite inspection, the buyer is the one on the hook.3 But the “as-is” provision will not protect the seller who knew about a condition that would materially affect the property’s value and failed to disclose it, either actively (by hiding it) or passively (by merely not mentioning it).4 Likewise, a general disclaimer denying any warranties will not protect a seller who fails to disclose known problems.5 At least one case has held that, to the extent “asis” clauses seek to remove sellers’ liability for fraudulent or negligent nondisclosure, they violate Civil Code section 1668, which prohibits contractual terms that seek to exempt someone from responsibility for their own fraud or negligence.6 Ultimately, the rule is that where a seller knows of a condition that materially affects the value or desirability of the property, he or she must disclose this information.7 Likewise, an “as-is” provision does not free a seller from making the disclosure requirements imposed by statute. The Civil Code requires a seller to provide a Real Estate Transfer Disclosure Statement to a buyer.8 The form of the disclosure is specifically set forth in the statute, and its topics include such items as environmental hazards, additions or modifications to the property, flooding, major prior damages, etc.9 Moreover, the seller must complete the statement in good faith.10 And most importantly, an “asis” clause cannotwaivethe obligation of a seller to provide this statement.11 “As-is” provi-

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2 See Katz v. Department of Real Estate (1979) 96 Cal.App.3d 895, 901.

3 See Shapiro v. Hu (1986) 188 Cal.App.3d 324, 333–334 (affirming trial court’s determination that an “as-is” clause barred plaintiff’s claim in part because termite inspection would have revealed the claimed defect).

4 Lingsch, supra, 213 Cal.App.2d 729, 740–741.

5 Id. at p. 743.

6 Orlando v. Berkeley (1963) 220 Cal.App.2d 224, 228.

7 See Civil Code §§ 1102.6, 1102.7.

8 Civil Code § 1102 et seq.

9 Civil Code § 1102.6.

10 Civil Code §1102.7.

11 Civil Code §1102.1 (em phasisadded), overruling Loughrin v. Superior Court (1993) 15 Cal.App.4th 1188.

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sion or no, a failure to comply with the statutory requirements, whether willfully or negligently, subjects the seller to liability for damages the buyer suffers.12 In sum, regardless of what the meaning of “as is” may appear to be, it assuredly does not mean that caveatem ptorremains the absolute rule for residential real estate purchases.13 Where a seller knowingly or negligently withholds information, including by failing to provide the requisite disclosures in the Real Estate Transfer Disclosure Statement, an “asis” clause will not provide protection. In short, under the law, “as-is” isn’t always how it is.

“As Is” For HOAs: Understanding the Association’s Independent Right to Bring Defect Claims In the homeowner association context, the “as-is” clause has an additional wrinkle in its application. Homeowner associations have the power to bring their own independent claims, separate and apart from those of their owners, including claims for construction defects.14 And in virtually no case does an association sign a purchase and sale agreements containing an “as-is” provision.

Developers often argue that because all of the owners had to sign the same purchase and sale agreement, its terms should be imputed to the association, which is, after all,

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12 Civil Code §§1102.1, 1102.13.

13 At first blush, Shapiro v. Hu, supra, 188 Cal.App.3d at pp. 333–334, does appear to be contrary to this rule. There, a buyer purchased a commercial property subject to an “as-is” provision and thereafter found a bulge in the basement wall. After the jury returned a verdict in the buyer’s favor, the judge overruled the jury and entered judgment for the seller. The Court of Appeal affirmed, holding that the “as-is” provision put the buyer on notice that no warranties were made, and the only exception to its application was fraud or misrepresentation by the seller. Id. But some commentators argue that Shapiro is “an aberrant decision based on unique facts.” Miller Starr, 1 Cal. Real Est. §1:154 (3d ed. 2009), at footnote 10. The jury had found no fraud despite affirmative representations and failure to disclose by the seller’s agent. Shapiro, supra at p 330.

Additionally, the court took pains to note that the buyers were businessmen and real estate agents who should have known what “as-is” meant, and in any event, a simple termite inspection would likely have revealed the bulge. Id. at p. 333. Thus, the court was skeptical that the bulge was not readily observable, ultimately confirming the rule that the “as-is” clause absolves a seller of defects in the observable condition. See id; see also, Miller Starr, supra at footnote 10.

14 See Civil Code §1368.3.

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comprised of the owners. But this is not the law. In fact, “as-is” clauses in individual owners’ purchase and sale agreements do not prevent an association from bringing its own claims for defects in construction.

Understanding why this is the case requires a brief discussion of corporations law (a proposition that threatens to be terribly boring but is terribly important). A homeowner association is a corporation and is effectively its own legal “person.”15 It may bring its own claims for construction defects without joining its individual members.16 These include claims for damages to common areas, or damages to separate interests that arise from or are integrally related to common area damages.17 The board of directors is responsible for making decisions on behalf of the corporation. In homeowner associations, the CC&Rs almost universally spell out the board’s power in this regard. But even in the absence of such specific language, the law is clear that “the business and affairs of the corporation shall be managed and allcorporatepowersshall be exercised by or under the direction of the board.”18 Ultimately, then, the association’s power to enter into contracts and to waive its claims resides with its board. As a result, no individual owner can waive an association’s claim. At most, when a buyer signs an agreement containing the “as-is” provision, all that has happened is a waiver of some of that individual’s claims against the developer/seller. But it does not waive the association’s separate claim. First, the association did not execute the purchase and sale agreement containing the clause; it is not a party to that agreement, which is between the owner and the seller.

And second, it does not matter that the owners, who are parties to the agreement, will eventually become members of the association. Even if all of the owners separately signed purchase and sale agreements containing “as is” clauses and/or warranty waivers, this would not prohibit an association from bringing its own claim. Why? Because the board has not authorized the waiver.19 It signed no “as-is” provision and it is not a party to the purchase and sale agreements containing the clause.But recently,

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July 2010 | ECHO Journal

some developers have become particularly creative, crafting their “as-is� provisions to expressly waive the right of the association to bring its own independent claim in exchange for a limited warranty from the developer.

Here is how one such provision reads:

BY BUYER’S SIGNATURE BELOW, BUYER ACKNOWLEDGES THAT THE WARRANTY IS A LIMITED WARRANTY AND IS THE ONLY WARRANTY BUYER WILL RECEIVE REGARDING THE PHYSICAL CONDITION OF THE UNIT AND COMMON AREA. SELLER HAS NO OTHER OBLIGATIONS WITH RESPECT TO CONSTRUCTION DEFECTS IN THE UNIT AND THE COMMON AREA. THE WARRANTY REPLACES ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, AND ALL OTHER RIGHTS OF ACTION (INCLUDING RIGHTS OF ACTION FOR NEGLIGENCE) IN FAVOR OF BUYER OR IN FAVOR OF ANYONE ELSE INCLUDING THE A SSO CIA TIO N. ‌ FIN A LLY, U N D ER THE W A R R A N TY THE A SSO CIA TIO N MA Y NO T A SSERT A N Y IN D EP EN D EN T R IG HT O F A CTIO N A GA INST SELLER FO R CO NSTRUCTIO N DEFECTS IN THE UNIT O R IN THE C O M M O N A R EA ‌ (em phasis added) What is the effect of this? In short, nothing. Association members simply cannot waive the association’s claims in this manner.

Think about it this way: I want Apple to waive a claim against me, say, for improperly “acquiring� and selling a prototype of its 4G iPhones after one of its employees leaves it at a bar. So, I go to all of Apple’s shareholders—yes, including Steve Jobs himself—and get each of them to sign a waiver that expressly states that they waive all of Apple’s claims. Has Apple effectively waived its rights? Absolutely not. Why? Because Apple is a corporate entity, in legal terms, its own person, and its board holds its decision-making authority. Unless the board votes to authorize execution of the waiver, the company has not acted, no matter how many individ19 A developer does control the board initially and, in theory, could execute a wavier or “as-is� agreement on behalf of the association at that time. But this would be a clear violation of the developer’s fiduciary duty to put the association’s interests ahead of its own while it controls the board. See Raven’s Cove, supra, 114 Cal.App.3d at p. 799. A developer in control of the board cannot use that power to force the board to execute an agreement that only benefits the developer itself.

ual shareholders sign my waiver and even if all of them do.20 This brings up a final logical problem with using “as is” provisions to bar an association’s claim. At the time purchasers sign their agreements, they aren’t even members of the association yet! Under most CC&Rs, purchasers do not become “Owners” and members of the association until they hold a recorded interest in the property; that is, a recorded deed. But that does not occur until after close of escrow and well after signing the purchase and sale paperwork. So, these purchase and sale agreements would have these purchasers waive claims on behalf of an association they don’t even belong to! Of course, such an act would be no more effective than your signing a document that waived Apple’s claims against me for that 4G iPhone I lost. Even if the owners had the power to make such a waiver on behalf of the association, they could not do so before they become association members.

“As Is” For Condominium Conversions Finally, what about condominium conversions? Conversions are obviously not new construction. So, do “as-is” provisions have any additional teeth in the conversion context, given that there is no dispute that the property is “used”? No, they do not, for two reasons.

First, remember that a condominium conversion is still, after all, a condominium. It has a homeowner association. That association has as much independent right to bring a claim as an association that governs a newlyconstructed project. So all of the analysis in the last section applies to conversions as well.

Unless the association’s board somehow signed such an agreement (and trust me, it didn’t), that provision will not operate to bar the association’s independent claims.

Second, the fact that a conversion is indisputably not new construction does not give more weight to the “as-is” provision.

Remember that a conversion is not simply an apartment project sold off in pieces. In order to convert a project, the developer has to prepare a budget and set the reserve and assessment amounts. A developer must do this with 20 In fact, in the case the author litigated from which this as-is provision was taken, the seller/converter attempted to use this clause to obtain summary adjudication against the association plaintiff. The court denied that motion on the grounds that the board never acted to waive its rights, and the case eventually settled on terms favorable to the association.

reasonable care. Certainly, if a converter knows the roof is failing and yet represents the roof has fifteen more years of useful life, an “as-is” clause will not save it from its misrepresentation. And it is no different if the developer simply hides its head in the sand.

If, for example, the developer has reports of problems with the roof from the time it was held as apartments, then fails to investigate these problems before conversion but still represents the roof to have a substantial useful life, that is actionable as a negligent misrepresentation. And, as we saw earlier, the association all on its own may bring that action.

If your association is facing a potential defect claim in the face of an “as-is” provision, you are ill-advised to walk away without first consulting competent, experienced counsel.

Homeowner associations facing construction defect actions invariably confront questioning, both from the developer and their own members, as to whether an “as-is” provision operates to bar any defect action they might bring. It does no such thing. This author has challenged those clauses in court on behalf of associations and won on precisely the theories identified here. And the alternative to such a challenge is for your association to bear the cost itself, meaning increased regular assessments or, worse, huge special assessments. If your association is facing a potential defect claim in the face of an “as-is” provision, you are ill-advised simply to walk away without first consulting competent, experienced counsel to guide you through the potential challenges you might raise. You may find that it is not always so clear what the meaning of “as is” actually is.

Matt Malone is an attorney in the litigation department at Berding|Weil in Alamo. He represents individual homeowners, commercial real estate owners and common interest developments in complex construction defect actions.

ECHO Journal | July 2010

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July 2010 | ECHO Journal

The 2010 legislative session so far has been an interesting one. Although there are fewer bills dealing with common interest developments than normal, there was one of great concern, AB 2502.

By Kerry Mazzoni

Mid-2010 Legislative Update he 2010 legislative session so far has been an interesting one. Although there are fewer bills dealing with common interest developments than normal, there was one of great concern, AB 2502 by Assembly member Brownley, dealing with modifications to the delinquency and financial thresholds established in the 2005 Ducheny bill, SB 137 dealing with foreclosures. Fortunately, there was strong opposition to the bill and the author decided not to move it.

T

Other bills of significant interest in this legislative session are discussed below: AB 1726 (Swanson) This bill is sponsored by CAI and sets 33 percent as the threshold for a quorum for an election if a quorum, as defined in the governing documents, is not met at the election meeting. The bill has an exception for associations

ECHO Journal | July 2010

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whose governing documents specify lower quorums. ECHO asked for an amendment to clarify that the reduced quorum was for the meeting for that election only. That amendment was taken, which moved our position from “support if amended” to “support.” The bill passed committee and the floor of the Assembly with broad bipartisan support.

Position: Support Location: Senate Transportation and Housing AB 1793 (Saldana) This bill would prohibit governing documents from prohibiting the use of artificial turf or any other synthetic surface that resembles grass. It takes the Lieu bill dealing with low water use plants of last year a step further. The bill was amended the day after it passed out of Assembly Housing and Community Development and passed the floor of the Assembly with broad bipartisan support. The amendment provides that the prohibition would not prohibit an association from applying landscape rules and regulations in the governing documents that would establish design standards and quality standards for the installation of the artificial turf. ECHO believes the bill is unnecessary and that decisions regarding artificial turf are best left to an association.

Position: Oppose Location: Senate Transportation and Housing

ECHO believes that decisions regarding artificial turf are best left to an association.

AB 1927 (Knight) This bill is sponsored by the California Association of Realtors and deals with rental rights. The bill provides that governing documents initially recorded on or after January 1, 2011 shall not prohibit the rental or lease of a separate interest unless the provision imposing the prohibition is approved by a 2/3 vote of all owners of separate interests.

The bill also provides that if there is a provision in the governing documents that prohibits the rental or leasing of separate interests that a statement describing the prohibition be included in the required disclosures. The bill passed Assembly Housing and Community Development, Assembly 16

July 2010 | ECHO Journal

Judiciary and the Assembly floor with broad bi-partisan support. CACM and CAI are neutral on the bill. ECHO remains opposed and believes that decisions regarding rental and lease rights are best made by an association, particularly given the downturn in the housing market and limits by lenders and insurers regarding the number of rental or leased units allowed relative to whether or not loans will be made and insured.

Position: Oppose Location: Senate Transportation and Housing

ECHO remains opposed to AB 1927 and believes that decisions regarding rental and lease rights are best made by an association.

AB 1975 (Fong) This bill is intended to address rental properties and requires that every water purveyor that provides water service to a multiunit residential structure for which a construction permit has been issued on or after January 1, 2012 provide individual meters or sub-meters for each unit with exceptions for structures greater than four stories above grade or for structures in which the owner or agent demonstrates that the structure’s plumbing configuration incorporates multiple points of entry in each dwelling unit, thus rendering the installation of submeters infeasible. ECHO has asked for an amendment exempting common interest developments.

The author is amending the bill and considering ECHO’s amendment. The bill is scheduled to be heard on June 22 in Senate Natural Resources and Water Committee.

Position: Support if Amended Location: Senate Natural Resources and Water Committee AB 2016 (Torres) This bill by the Chair of the Assembly Housing and Community Development Committee clarifies previously chaptered legislation relating to notices of default. The bill provides that a request by an association for ECHO Journal | July 2010

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notification of a trustee’s deed of sale does not constitute a request for a document that either effects or evidences a transfer or encumbrance of an interest in real property or that releases or terminates any interest, right or encumbrance of an interest in real property. The bill passed the Assembly on the consent calendar.

Position: Support Location: Senate Judiciary

Bill AB 2016 provides that a request by an association for notification of a trustee’s deed of sale does not constitute a request for a document that either effects or evidences a transfer or encumbrance of an interest in real property or that releases or terminates any interest, right or encumbrance of an interest in real property.

AB 2120 (Silva) This bill originally deleted the requirement that a copy of the California Mobilehome Residency Law be provided to all homeowners by February 1 of each year by the management if a significant change was made in that law during the prior year. The bill was amended to change the notification requirement to provide all homeowners with a copy of the law or notify them that they can obtain a copy free of charge and that a change has been made. The bill passed the Assembly Floor with broad bipartisan support.

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Position: Neutral Location: Senate Judiciary AB 2762 This is the housing omnibus bill that contains only non-controversial provisions.

Position: Watch Location: Senate Rules SB 1221 (Calderon) This bill makes conforming and clarifying changes regarding a notice of sale. The bill passed out of the Senate on the consent calendar.

Position: Watch Location: Assembly Banking and Finance SB 1427 (Price) This bill has been amended to provide that the costs of nuisance abatement measures taken by a governmental entity are the obligation of the legal owner and that fines would be treated as a tax lien against the property in a foreclosure sale. The bill also provides that the cost of nuisance abatement shall not exceed the actual costs of the abatement and that any fines or penalties imposed by a local ordinance, subject to a notice of default, on a property that has not been purchased at a foreclosure sale or acquired through foreclosure under a mortgage or deed of trust are the obligation of the owner of record at the time of the violation and that any lien imposed against that property shall attach to the parcel upon recordation of the lien.

Position: Support Location: Assembly SB 1047 (Correa) This spot bill has been amended to exclude a subdivision, cooperative or condominium for mobile homes and a nonprofit resident-owned mobile home park from the definition of a “resident-owned mobile home park.�

Position: Watch Location: Assembly

Kerry Mazzoni is the Legislative Advocate for ECHO. She served in the State Assembly previously.

ECHO Journal | July 2010

19

By David West

The Disclosure Trap Part 2

20

July 2010 | ECHO Journal

The Cast Sally, the association’s manager Jones, recent buyer Brown, attorney for Jones Steve, the association’s regular counsel hen we last left Sally, she was trying to figure a way out of certain disaster.1 There was not one piece of good news in this sordid saga. A brief recap:

W

About two and a half years ago, Sally finally got the board to approve a competent inspection of the property. The engineer found damage requiring removal of the stucco and replacement of windows and balconies and, of course, the roof. The total was $3,000,000.

Jones purchased in November 2007, after the inspections but before the board notified members of the problems. The 2008 budget and Assessment & Reserve Funding Disclosure Summary, hot off the press, were in the last set of documents he read and approved before closing escrow. These documents did not disclose what the board knew.

After the disclosure and the explosion from the membership, owners approved a $30,000 per unit special assessment due in November 2008; Sally worked out a bank loan for the other half. Attorney Brown notified the association that his client, Jones, would pay neither the special assessment nor that portion of the regular assessment to retire the loan. His basis for this position was simply that Civil Code Section 1365(a)(3)(A) and 1365.2.5, the Disclosure Form, requires disclosure of deferred maintenance and unfunded liabilities. The Disclosure Form did not discuss the stucco or sliding glass doors; these were not classified as reserve items. The roof was listed in the reserve study, but the replacement cost was twice that reported. Brown contended that the board knew, or should have known, of the problems.

Steve, the association’s attorney, stated the board could not forgive the assessment and must take steps to collect from Jones. Everyone understood that Brown would file a lawsuit when the association filed the lien.

Sally, looking for a way out of the mess, checked to see if the association’s Directors and Officers’ policy would

Nancy, the association’s litigation counsel Ralph, attorney for the management company Jack, the association’s insurance broker

eventually pay Mr. Jones’ share. The answer was, as expected, negative.

The heart of the story is that the board did not look at the property under their care. Sally and the association’s attorney are sure that Brown will present evidence that the board knew of roof and leak problems but failed to investigate. Each member of the board breeched the duty to inquire as set forth in Section 7231(a) of California Corporation Code.2 Importantly, Section 1365.5(e) requires the board to review the reserve study annually. It appears axiomatic that this review can only be accomplished by comparing the study with the physical condition of the property.

When tempers flared and the board blamed Sally, she calmly responded by noting that her management agreement did not include this service and thus the Civil Code settles this obligation on the board.

Under Civil Code Section 1365, the association must prepare and distribute various reports to members. Important to Mr. Brown’s argument is Section 1365(a)(3)(A): “[W]hether the board of directors of the association has determined to defer or not undertake repairs or replacement of any major component with a remaining life of 30 years or less, including a justification for the deferral or decision not to undertake the repair or replacement.” Then Section 1365(a)(3)(B) requires that the board disclose the possibility of a special assessment. The statute settles this as the association’s duty to disclose, but the board’s duty is to make the determination whether to defer or not undertake repairs, along with justification.

Brown’s letter indicates that he and his client believe 1 See West, D., “The Duty to Inspect,” ECHO Journal, June 2008, and West, D., “The Disclosure Trap,” ECHO Journal, December 2008.

2 In “The Duty to Inspect” we examined the distinction between this duty and that of the board under Civil Code Section 1365.5(e) to inspection in conjunction with the reserve study.

ECHO Journal | July 2010

21

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the board did not inspect, did not reconcile the condition of the property to the budget, and did not properly anticipate the special assessment, all to the detriment of his client.

His main point: If my client had known, he would not have purchased, or certainly not for the price paid.

of sleeplessness. After all, she knows that none of the directors has any experience with construction. In retrospect, she really should have pushed much harder for an outside expert. Maybe, Sally hopes, Ralph, the company attorney, can offer a happier perspective.

So here Sally sits, looking over the various documents and trying to organize this in a way that the board will understand. The board, after months of questioning and legal investigating, feels persecuted and angry.

The board is very sensitive about the legal fees (huge); Sally has only charged about a third of her time. Sally is a little haggard and feels the pressure; her operations manager wants to see her in an hour. The company attorney, Ralph, is at the company’s office to evaluate management’s liability. Here is what comes to mind as she thumbs through the stack of papers:

There is no question that the association was in trouble once Mr. Jones decided not to pay either the special assessment or his portion of the assessments necessary to retire the loan. The association could not forgive the debt and had to proceed with collection. The countersuit brought by Brown, the homeowner’s attorney, was pretty much a foregone conclusion. The really painful part was discovery.

“Most of this really isn’t my fault,” Sally thinks. “The management contract clearly stated that we are only required to inspect the building from the ground.” Whether this is a ‘reasonable’ inspection as discussed in her last CACM ethics class caused Sally a bit 22

July 2010 | ECHO Journal

Brown asked for a five-year history of maintenance and maintenance requests.

Nancy, the association’s litigation attorney, could find no privilege that would prevent discovery of this information. Nancy further advised that it would be a serious mistake to pretend the information didn’t exist; the interrogatories specifically included information on computers as well as in the files.

Brown asked for names and contact informa-

tion for residents and owners over the last five years. “Oh, Oh, Oh,” thought Sally, “what will these people say?”

When Sally copied her emails, she realized how loose she and the board had been in their conversations. Cavalier statements, akin to ‘we don’t have time for your (leak) problem,’ will certainly prejudice a jury, maybe even a judge. Some remarks were slanderous, and that was the nice way to look at them.

This would not be pretty. Some clearly contradicted subsequent ‘sanitized’ versions of the board’s decision-making process. And, Sally realized, she did nothing to stop these practices and even participated.

Brown also requested all minutes and status reports. Again, no privilege to block production. When Sally first reviewed the interrogatories, she knew she really had a problem. The board had been discussing the roof problem for years, as reflected in the minutes. Sally’s status reports included letter from owners about the leaks and problems closing sliding glass doors. The minutes did not include or reference this information.

Continued on page 24

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.

The Disclosure Trap Continued from page 22

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Then there was the big ‘omission’; the board met, not just once but a couple of times, and did not approve or publish the minutes. Yes, Sally took the minutes, but the board refused to approve them. There was no applicable exception to the Open Meeting Act, but the board instructed Sally not to disseminate draft minutes. These were the first discussions of the problem, more than three years ago when the board first discussed the problems in detail and agreed to hire the engineer and then, of course, the engineer’s report. The board simply didn’t want to tell the members. Sally really doesn’t know what Ralph will say about this. She has a sinking feeling that the company will be dragged through the mud on this issue. After all, she could have alerted Steve, the association’s attorney, who would explain the risk facing the board. Now it is too late; no way to rewrite history. She really should have brought this to the attention of her operations manager.

The status reports and letter to members pose another hurdle for Sally and her company. When Sally reviewed them in preparation for delivery to Brown, she recognized the glaring inconsistencies between the two sets of documents. The correspondence to members and residents could be viewed as a ‘whitewash.’ Residents were told that the problem would be addressed, that the problem was minor, that management would have a contractor look at the problem, and finally that the association would repair the interior damage ‘later’, after the installation of a new roof.

The status reports told a different story: repair invoices from three roofing companies stating that the roof was in such poor condition that there was no effective repair solution; the two companies that tried to repair a sliding glass door, warning of substantial structural problems; and, of course, Sally’s dire warnings that the directors couldn’t bury their heads in the sand (how she finally pushed the board to hire the engineer). Sally cited Corporate Code Section 7231—the part that says “A director shall perform the duties of a director... in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.” The question Sally anticipates that

Ralph will ask her is “Did you really believe the answers you published to the members , the ‘everything is fine, no real problems’ part?” Sally gets a very sick feeling in her stomach that trying to protect the board may have been a very bad idea. Maybe she can justify her acts by stating that she works for the board and not the association (true).

Then there were the budgets. Of course Sally prepared the budgets; it is part of her management duties that is specified in the contract. She coordinated the reserve study, supplying the preparer with the necessary information. Of course the board didn’t want to spend the money to have the reserve study preparer visit the property; so they continued to use the old numbers. No one checked.

Sally later told the board that it was not management’s obligation to make this visual comparison under the contract. What bothers Sally now is the realization that she should have pushed the board to investigate and perhaps refuse to disseminate what she should have known to be misleading information.

But wait, thinks Sally, maybe things aren’t so dire. Even though the association’s D & O insurance won’t cover Jones’ $60,000 total assessment, maybe they will cover legal fees for the board and management. After all, the association’s governing documents provide that the board has the authority to hire management to assist in carrying out the board’s duties. Jack, the association’s insurance broker, is quick to respond. “If the board, their agent, or an individual director breaches their fiduciary obligation to the association, D & O may not provide coverage.”3 Jack continues the analysis of D & O coverage as it applies to both the directors and manager (luckily, the association’s policy does cover Sally’s company); the directors fall under the ‘safe harbor’ provision of Civil Code Section 1365.7 and Corporate Code Section 7231, provided, Jack emphasized, that they follow the business judgment rule— that ‘good faith’ thing.

Just what is ‘good faith,’ Sally wonders as she recognizes the first sign of a huge migraine. Sally jumps up from her desk as Ralph walks by and asks Ralph to visit for a minute. Cautiously she asks Ralph to explain ‘good faith.’ Ralph, already more than just a little concerned, says that although abstract and not well defined in law, good faith is generally considered to be an honest belief unclouded by ulterior motive and “… free-

dom from knowledge of circumstances which ought to put the holder upon inquiry.”4 Thanking Ralph, Sally reaches for two more aspirins. Wow. No way can she paint this picture to reflect good faith. The board met without noticing members or publishing an agenda in order to discuss the repair complaints and then refused to publish the minutes. Sally didn’t do any better because she didn’t object to practices she knew to be wrong, published a ‘fairy tale’ budget, and basically lied to members who complained about water intrusion.

Jack also talked about fiduciary duty and utmost loyalty. Philosophically, as Sally pulls together her papers for the meeting, she realizes that her duty is to the board and the board’s duty is to the association. The board’s duty is to tell the hard truth in order to preserve the property, the only corporate asset. Directors are caretakers for current and future owners; they should not act like politicians seeking only to preserve their own status. The manager’s primary job is to advise the board. Sally thinks of the CACM Code of Ethics requiring loyalty, fidelity and integrity.

Yes, she supported the board. No, she did not uphold the letter or spirit of DavisStirling. And no, instead of telling the client to do the right thing, she elevated the monthly management fee (and her pay) above what she knew to be right. As she walked to her manager’s office, she realized she sacrificed her integrity for a paycheck and the approval of these directors.

And who really benefited, she mused? The directors are almost personaenon gratae, members feel completely betrayed and much poorer ($30,000 each plus a 23% increase in assessments), and then there is the question of the current lawsuit quite likely to be joined by the three other owners who bought during this period. That swells the total to $240,000 plus legal fees. Seems pretty clear that the court will recognize that buyers have the right to rely on the disclosures produced by the association (yes, Sally thinks, that’s me). $240,000 plus probably another $100,000 for Brown.

There is a membership meeting to discuss the legal fees. The consensus seems to be that the members should not bear this cost 3 See State Farm v. Mintarsih, L.A City Superior Ct BC334728 (Cal. App .2d, 2009), certified for publication. Because the underlying claim was not covered, there was no right to recover attorney fees under the insurance policy.

because they had nothing to do with the way the board or management conducted business. The cost of defense, worries Sally, could easily be another $150,000. Wow, that is almost $250,000 in legal fees. It doesn’t seem like any of the directors has that kind of big money. Maybe she should ask Ralph if this is ‘joint and several’ liability (based on the company’s breach of it fiduciary duty, or gross negligence) where the company might be the deep pockets and pay any judgment imposed by the court. No, thinks Sally, maybe now is not the time to ask that question.

Oh, maybe you thought I meant that the board was caught?

Stay tuned for the next installment—could the board really be stuck with the attorney fees?

David West has been in the CID industry for 25 years and real estate for 35 years. Mr. West holds a law degree from JFK University and owns West Management Company, Inc., and Lighthouse Maintenance and Repair Company.

He is a member of ECHO and is a licensed Real Estate Broker.

4 Black’s Law Dictionary, Sixth Edition, pg. 693.

ECHO Journal | July 2010

25

By Dennis Socher and Charlotte Allen

An Association Insurance Survival Kit nsuring a common interest development (“CID”) certainly involves several elements similar to a survival kit and its various necessary components. Just as you would pack a survival kit at home for you and your family, as a common interest community you must also prepare for a loss by obtaining the essential insurance coverage. Visualize, for a moment, what your home survival kit might look like. What is absolutely mandatory that you have packed to withstand a foreseeable disaster? Certainly, there are many things you may want to include but the bare essentials are truly the most important and more likely the first to be used. From this article, you will learn about the basic coverage necessary to insure a common interest community and, at the very least, you’ll walk away knowing how to pack a survival kit.

Experts suggest that a survival kit should include one gallon of water per person per day. A typical home survival kit may last one week whereas an insurance policy typically offers a one-year term. A community needs to make certain adequate coverage exists at all times. Let’s think of “water” as property coverage for your community. In order to make certain you always have an ample supply, verify that the replacement cost reported is, in fact, adequate; make certain the policy

I

26

July 2010 | ECHO Journal

includes Building Ordinance Coverage as well as coverage for sewer drain backup.

Property Value/Replacement Cost Insuring the property accurately can prevent the potential for hefty out-of-pocket expenses for unit owners at the time of a major property loss. Your association should be insured, at a minimum, for the value that your governing documents require, which is typically full replacement cost. Building values can be calculated through Marshall Swift Boeckh (www.marshallswift.com), an industry-wide program. Information used to calculate building values should be based on research and accurate square footage your broker has obtained.

Building Ordinance Coverage A, B and C Building Ordinance Coverage A (Contingent Liability) provides coverage for undamaged portions of property. For example, if half of a building burns down, the property insurance coverage will replace the half of the building that is damaged.

However, a majority of the cities and counties in California have ordinances that require the association to demolish the remaining 50 percent (or less) and rebuild as a whole.

Since the unburned portion of the building is undamaged, the property insurance sec-

tion does not provide coverage unless Building Ordinance Coverage A is included.

Coverage B (Demolition) provides coverage for demolition. This coverage is selfexplanatory; however, because demolition can become costly if heavy machinery is needed, this coverage is an important component of full coverage.

Coverage C (Increased Cost of Construction) provides coverage for building code upgrades (local ordinances) and/or increased cost of construction. For example, assume that a building was to burn down and local ordinance requires that the reconstructed building include updated fire sprinklers and a hard-wired fire alarm system. Building Ordinance C will provide this coverage to the association.

Sewer Drain Back-Up coverage This coverage is quite literally what it states. Below are examples of common instances where this policy would provide coverage for the association: • Someone might flush an object(s) down a toilet that should not be flushed, causing back-up and property damage.

Continued on page 31

ECHO Journal | July 2010

27

News from ECHO

What The Law Says “As Is” Is Over the past several decades, both the legislature and the courts have grappled with the meaning and effect of “as-is” provisions in California. As it stands now, the law is this: An “as-is” clause protects a seller from postsale claims by the buyer as to conditions that the buyer could view or observe. It does not protect sellers where they either actively or passively conceal known problems with the property that might affect its value, or otherwise fail to meet the disclosure obligations set forth in the Civil Code.

An “as-is” provision “means that the buyer takes the property in the condition visible or observable by him.” It does not impose upon the buyer any additional obligation to conduct independent investigations as to the state of the property. Of course, this does not give the buyer carte blanche to sue for anything he or she happened not to see. If a matter was obvious or could have been discovered through reasonable diligence, such as a standard termite inspection, the buyer is the one on the hook.

But the “as-is” provision will not protect the seller who knew about a condition that would materially affect the property’s 28

July 2010 | ECHO Journal

value and failed to disclose it, either actively (by hiding it) or passively (by merely not mentioning it). Likewise, a general disclaimer denying any warranties will not protect a seller who fails to disclose known problems. At least one case has held that, to the extent “as-is” clauses seek to remove sellers’ liability for fraudulent or negligent nondisclosure, they violate Civil Code section 1668, which prohibits contractual terms that seek to exempt someone from responsibility for their own fraud or negligence.

Ultimately, the rule is that where a seller knows of a condition that materially affects the value or desirability of the property, he or she must disclose this information.

Likewise, an “as-is” provision does not free a seller from making the disclosure requirements imposed by statute. The Civil Code requires a seller to provide a Real Estate Transfer Disclosure Statement to a buyer. The form of the disclosure is specifically set forth in the statute, and its topics include such items as environmental hazards, additions or modifications to the property, flooding, major prior damages, etc. Moreover, the seller must complete the statement in good faith. And most importantly, an “as-is” clause cannot waive the obligation of a seller to provide this statement. “As-is” provision or no, a failure to comply with the statutory requirements, whether willfully or negligently, subjects the seller to liability for damages the buyer suffers.

In sum, regardless of what the meaning of “as is” may appear to be, it assuredly does not mean

that caveat emptor remains the absolute rule for residential real estate purchases. Where a seller knowingly or negligently withholds information, including by failing to provide the requisite disclosures in the Real Estate Transfer Disclosure Statement, an “as-is” clause will not provide protection. In short, under the law, “as-is” isn’t always how it is.

Committee Seeks Candidates For ECHO Board The Nominating Committee for the ECHO Board of Directors is seeking persons who are interested in being considered as candidates for positions on the Board of Directors. Four positions on the board will be up for election at the ECHO Annual Meeting that will be held in October. These positions are for three-year terms.

Board members are expected to attend all of approximately six three-hour board meetings held each year, generally at the ECHO Office in San Jose. Each board member also serves on one or more committees that hold regular meetings throughout the year. These two activities involve a commitment of four to six hours per month plus travel time. In addition members are expected to attend the Annual Seminar, Annual Meeting and a two-day board retreat each

November. Board members receive no reimbursement for these activities. Nominees will also be expected to have been recent active participants in ECHO activities and to have thorough familiarity with ECHO and the CID industry.

Persons interested in being considered for nomination should obtain and complete a nomination and qualifications form, available by request from the ECHO office, and return it to the office by August 15.

Consent to Receive Documents Electronically The California Legislature in 2009 approved a bill sponsored

by ECHO to allow (among other provisions) for annual distribution to association members of a number of documents by electronic means if those members consented in writing to such means of transmissions. In response to a large number of requests to the ECHO Office, Attorney Tom Fier and a member of the ECHO Legal Resource Panel prepared a form that associations may use to allow members may give their approval. The form was published in the June 2010 ECH O Journal. The form was provided as general information, and associations may want to consult their own legal counsel about its use.

2010 Legislation at a Glimpse As of June 14, 2010 Bill No.

Author

Subject

Status

Position

Summary

AB 1726

Swanson

Voting Quorums Amended 5/3.

Hearing 6/22 in Senate Housing.

Support

In the event that there is not a quorum for a member meeting or an election of directors, would automatically reduce the quorum requirement for the next meeting to 33 percent of the members entitled to vote. Exempts associations whose documents establish a lower quorum requirement.

AB 1793

Saldana

Synthetic Grass Amended 6/9.

Hearing 6/15 in Senate Housing.

Oppose

Voids provisions in governing documents that prohibit the use of artificial turf or any other synthetic surface that resembles grass.

Allows associations to adopt rules that establish design and quality standards.

AB 1927

Knight

Rental Rights

Amended 6/9.

Hearing 6/15 in Senate Housing.

Oppose

For governing documents initially recorded on or after January 1, 2011, requires that 2/3 of all owners vote to approve rental or lease restrictions. Requires owners to disclose rental restrictions prior to transfer of title.

AB 1975

Fong

Submetering

Amended 6/1.

Hearing 6/22 in Senate Natural Resources.

Support if Amended

Requires that every water purveyor that provides water service to a multi-unit residential structure for which a construction permit has been issued on or after January 1, 2012 provide submeters for each unit.

AB 2016

Torres

Deed Requests

Passed Assembly.

Hearing 6/15 in Senate Judiciary.

Support

Clarifies that a request by an association for notification of a trustee’s deed of sale does not constitute a request for a document that either effects or evidences a transfer or encumbrance, or that releases or terminates any interest, right or encumbrance, of an interest in real property.

AB 2120

Silva

Mobilehome Law Disclosure

Amended 5/20.

Hearing 6/15 in Senate Judiciary.

Neutral

Each year, would require that the management provide a copy of the Mobilehome Residency Law to each resident, or send a notice when a significant change is made and inform residents that they can obtain a copy by submitting a request.

AB 2502

Brownley

Delinquency Collection

Amended 5/10.

In Assembly Judiciary.

Oppose

Regulates third parties performing collection services for HOAs, as well as the formation of payment plans between associations and delinquent members. Allows members to have counsel present when discussing a payment plan, provided they give 48 hours notice to the association.

SB 995

Strickland

Conversion Plans

In Senate Local Government.

Hearing cancelled.

Watch

Provides that a stock cooperative or community apartment project for senior citizens established before the DavisStirling Act, that is converting to a condominium, shall not be required to file a condominium plan to the Department of Real Estate.

SB 1427

Price

Default Notices

Amended 5/12.

Hearing 6/22 in Assembly Judiciary.

Support

When a property is purchased at a foreclosure sale and is not being maintained, requires a governmental entity to provide notice of violations to the property owner before imposing fines for nuisance abatement.

ECHO Journal | July 2010

29

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

New Member Listings Brandon & Tibbs Accountants 3 Quail Run Circle, Ste. 200 Salinas, CA 93907 Contact: Stuart Burbank Tel: 831-758-4481 Fax: 831-758-1485 www.brandon-tibbs.com Email: tangol@brandon-tibbs.com City National Bank 224 Airport Parkway San Jose, CA 95110 Contact: Kelli Crowley Tel: 650-812-8306 Fax: 408-392-2121 www.cnb.com Email: kelli.crowley@cnb.com CNB offers a full complement of banking, trust and investment services through 73 offices, including full service regional centers in the SF Bay Area, Southern California, Nevada and New York City. We deliver specialized and highly personal service and complete financial solutions to clients.

Valley Landscape 27050 Moody Road Los Altos Hills, CA 94022 Tel: 650-948-9474 Fax: 650-948-0113 Contact: Sarah Schriner Email: sarah@valleylandscape.net Valley Landscape is a full service professional landscape maintenance company specializing in residential communities and servicing property managers for over 30 years.

Owner supervised. We can improve your landscape and cut water costs. 24 hour emergency services.

30

July 2010 | ECHO Journal

Insurance Survival Kit Continued from page 27

• Laundry soap can build up in common area lines causing back-up and possible property damage. • Foreign objects from outside the association can end up in association lines and cause backup; however, invasion by tree roots is not a covered loss, as it is considered an uninsurable risk (act of nature).

An essential part of a survival kit is, of course, first aid supplies. After all, one should be prepared for bodily injury.

Commercial General Liability This is typically a very broad policy and includes coverage for loss exposure such as bodily injury and third party property damage. The Davis-Stirling Act (Civil Code §1365.9) requires at least two million dollars in Commercial General Liability coverage if the common interest development consists of 100 or fewer separate interests and at least three million dollars if the common interest development consists of more than 100 separate interests.

Third Party Bodily Injury A common example of third party bodily injury losses are slip and fall claims. Whether a person is supposed to be on the common area premises of the association or not, if he or she were to get injured, this coverage would protect the association.

Third Party Property Damage Another area where you want your survival kit ready and capable is if your property causes damage to someone else’s property. For example, a common area tree may fall onto a neighbor’s car or house. You want to be prepared for these circumstances.

Other Necessary Coverage • Coverage for Personal Injury (Libel, Slander) • Unit Owners as additional insured • Management as additional insured • No exclusion for Assault and Battery • No animal exclusion As board members, you are charged with making day-to-day decisions in the best interest of the community. It is imperative that you are protected, and the Davis-Stirling Act (Civil Code §1365.7.) requirements call for at least $500,000 in Directors and Officers

Continued on page 33

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M & C Association Management Services provides community association management and developer services to Fremont, Pleasanton, Santa Clara, Stockton, Modesto, Copperopolis and the surrounding foothills.

Since 1990, our sole focus has been to deliver performance that enriches communities and enhances the lives of the people we serve. M & C is proud to be an Accredited Association Management CompanyŽ (AAMCŽ), which is the Community Associations Institute’s highest GHVLJQDWLRQ DZDUGHG WR PDQDJHPHQW ÀUPV

3 3OHDVDQWRQ ‡ )UHPRQW ‡ 6DQWD &ODUD OHDVDQWRQ ‡ )UHPRQW ‡ 6DQWD &ODUD S Stockton tockton 209.644.4900 209.644.4900 ‡ ‡ 0RGHVWR ‡ &RSSHURSROLV 0RGHVWR ‡ &RSSHURSROLV For management proposal information, please visit www w.mccommunities.com or email inffo@mccommunities.com

ECHO Journal | July 2010

31

Nominating Committee Seeks Candidates for the ECHO Board of Directors The Nominating Committee for the ECHO Board of Directors is seeking names of persons who are interested in being considered as candidates for positions on the ECHO Board of Directors. Four positions on the board will be up for election at the ECHO Annual Meeting that will be held in October.

These positions are for three-year terms.

Current directors whose terms expire in 2010 are John Garvic, David Levy, Karl Lofthouse and Wanden Treanor.

Board members are expected to attend all of approximately six three-hour board meetings held each year, generally at the ECHO 32

July 2010 | ECHO Journal

Office in San Jose. Each board member also serves on one or more committees that hold regular meetings throughout the year. These two activities involve a commitment of four to six hours per month plus travel time. In addition members are expected to attend the Annual Seminar, Annual Meeting and a two-day board retreat each November. Board members receive no reimbursement for these activities. Nominees will also be expected to have been recent active participants in ECHO activities and to have thorough familiarity with the organization and the CID industry.

Persons interested in being considered for nomination should obtain and complete a nomination and qualifications form, available by request from the ECHO office. Every potential candidate, including incumbents, must submit a full form. All completed forms must be submitted to the ECHO office no later than Aug 15, 2010, to be considered by the nominating committee. Those requesting nomination may be requested to interview with the nominating committee.

The committee will meet in late August to prepare recommendations for board consideration.

Insurance Survival Kit Continued from page 31

(D & O) coverage limits. Consider this type of policy as a way to protect or “feed” the association’s leaders and decision makers.

You will want to make certain the policy offers enough coverage for all and has an ample shelf life. An effective stand-alone D & O policy should include broad coverage, including Duty to Defend (which guarantees money for defense even if the loss itself isn’t covered), coverage for non-monetary claims, full prior acts, committee members and spouses and, additionally, it should provide coverage of management.

What is D & O Liability?

D & O Liability is defense (expenses) and indemnity (awards and settlements) for wrongful acts and allegations against the board of directors as well as the association.

This coverage is also known as Errors and Omissions Liability as this coverage provides for these types of losses as well.

Typical D & O liability claims range from monetary to non-monetary, breach of contract to violation of CC&Rs, discrimination to libel/slander. The majority of claims for common interest developments are nonmonetary, such as a claim that the board failed to purchase adequate insurance.

Interestingly, in the current economy, D & O liability claims have doubled over what they typically are in a more stable economy.

What Type of Coverage and Coverage Enhancements Should Be Automatically Included?

• Broad definition of insured and wrongful act; • Duty to Defend • Coverage for Monetary and Non-monetary Claims • Coverage for Breach of Contract • No exclusion for Discrimination (Fair Housing Act Claims) • Personal Injury (Libel and Slander) • No Insured versus Insured exclusion • Management as additional insured Commercial Umbrella Liability These policies (“CUP”) are an inexpensive way to extend liability protection beyond the limits of underlying policies, the same way a poncho might protect you from the rain. The

Continued on page 34 ECHO Journal | July 2010

33

Insurance Survival Kit Continued from page 33

reason a CID would want to purchase a CUP is to both satisfy the Davis-Stirling Act General Liability insurance requirements and/or simply enhance the association’s limits of liability coverage. A broad Umbrella policy will offer coverage in excess of both the General Liability and Directors and Officers insurance coverage, as well as other liability insurance policies such as Employer’s Liability (Workers Compensation).

Is There Anything Else to Look for in a Commercial Umbrella Liability Insurance Policy?

Yes, there are two types of insurance coverage within a CUP: Coverage A (Excess Liability) and Coverage B (Umbrella Liability). Excess Liability is actually the portion of the CUP that extends over the underlying liability insurance policies whereas Umbrella Liability provides first dollar coverage (sometimes minus a self-insured retention) when an underlying insurance policy excludes the loss and the CUP does not have a similar exclusion. The association should look to purchase a CUP that includes both Coverage A and Coverage B.

The How-to Guide for Associations

Hailed as the h most complete l and d useful reference available for homeowner associations, members, officers and directors. If you want to learn how to manage, operate and participate effectively in your association, you will want to read this book.

Order the book today, call 408-297-3246, fax 408-297-3517 or email: info@echo-ca.org 34

July 2010 | ECHO Journal

Disaster assistance programs suggest that every household have an appropriate amount of cash in its survival kit One thing to look for when purchasing a Commercial Umbrella Liability policy is that the CUP’s effective dates run congruently with the underlying insurance policies. This reduces the potential for a gap in coverage.

Fidelity Bond Disaster assistance programs suggest that every household store an appropriate amount of cash in its survival kit in case, for some reason, bank funds aren’t readily accessible. Similarly, Fidelity Bonds provide coverage in a dollar amount for employee dishonesty. In the CID industry, the board of directors and committee members are sometimes considered non-compensated employees. A Fidelity Bond is an insurance policy

that covers the association should a director or the management company steal association funds. Although with current technology it is difficult to do so, there are still such thefts reported every month. For a nominal fee the community can adequately protect itself in the event of such a loss. Please refer to your governing documents to determine the amount of Fidelity Bond coverage that needs to be purchased. And be sure that your management company is included in the coverage.

bly knows or should know the most about your community and what needs to be protected. Ask your insurance broker to provide an annual review of coverage and to

Other types of insurance coverage available to CIDs include Workers Compensation, Flood, and Difference in Conditions including Earthquake. Employment Benefits and Employment Practices Liability are available for homeowner associations with employees.

In the event of emergency, we typically rely on media outlets for valuable information and updates. You should expect that same dependability from your Insurance Broker. After all, besides you and your property manager, your insurance broker proba-

present any recommendations they have to improve or enhance it. Invite them to share their findings at a board meeting at least one month before renewal.

You should also invite your broker to attend board meetings here or there during the policy term. This provides you a chance to ask questions about insurance but also gives you face time with the person you pay to protect your community year after year.

Depend on your broker for market updates, policy form and language interpretation, and assistance with claims or potential claims the same way you would utilize an AM radio for updates during a disaster.

Your insurance broker is the middle person between the association and the insurance carrier.

Ask for her/his opinions. This is, after all, their specialty. You should not only feel protected by your insurance coverage but also comfortable with the hands in which you’ve placed your coverage.

Dennis Socher and Charlotte Allen are licensed insurance agents/brokers with Socher Insurance Agency, an ECHO member company. They focus on helping common interest development boards and managers find value in their insurance.

ECHO Journal | July 2010

35

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

Condominium Bluebook 2010 Edition $18.00 Non-Member Price: $25.00

Homeowners Association and You $13.00 Non-Member Price: $20.00

Community Association Statute Book—2010 Ed. $15.00 Non-Member Price: $25.00

This directory lists all business and professional members of ECHO as of December 2007. Current addresses, telephone and fax numbers, email addresses, and a short description are included. This directory is an invaluable tool for locating service providers that work with homeowner associations.

This well-known compact guide for operation of common interest develop ments 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.

A practical problem solving guide to all aspects of community association living. Written by two long-time association residents, it provides an insightful overview of community living from the viewpoint of experienced owners in readable language.

Recently revised and expanded.

Contains the 2010 version of the Davis-Stirling Common Interest Development Act, the Civil Code sections that apply to common interest developments and selected provisions from the Civil, Corporations, Govern ment and Vehicle Codes important to associations.

Robert’s Rules of Order $7.50 Non-Member Price: $12.50

The Board’s Dilemma $10.00 Non-Member Price: $15.00

A step-by-step guide to the rules for meetings of your association, the current and official manual adopted by most organizations to govern their meetings. This guide will provide many meeting procedures not covered by the association bylaws or other governing documents.

In this essay, attorney Tyler Berding confronts the growing financial problems for community associations. Mr. Berding addresses board members who are struggling to balance their duty to protect both individual owners and the corporation, and gives answers to associations trying to avoid a funding crisis.

California Building Guidelines for Residential Construction $52.50 Non-Member Price: $60.00

e Pricuced Red Homeowners Associations— How-to Guide for Leadership $25.00 Non-Member Price: $25.00 This well-known guide and reference is written for officers and directors of homeowner associations who want to learn how to manage and operate the affairs of their associations effectively.

This easy-to-read manual is an excellent tool to understand a new home.

It contains chapters covering more than 300 conditions that have been sources of disputes between homeowners and builders, offers homeowner maintenance tips, and defines the standards to which a residence should be built.

Be an HOA Survivor

Questions & Answers About Community Associations $18.00 Non-Member Price: $25.00 For 12 years, Jan Hickenbottom answered homeowners’ questions in her Los Angeles Times column on community associations. Now collected in one volume, readers can find answers to almost any question about CIDs.

Reserve Fund Essentials $18.00 Non-Member Price: $25.00 This book is an easy to read, musthave guide for anyone who wants a clear, thorough explanation of reserve studies and their indispensable role in effective HOA planning. The author gives tips to help board members mold their reserve study into a useful financial tool.

2010 ECHO Annual Seminar Program

The Condo Owner’s Answer Book $15.00 Non-Member Price: $20.00 An excellent guide to understanding the rights and responsibilities of condo ownership and operation of homeowner associations. The question-and-answer format responds to more than 125 commonly-asked questions in an easy to understand style. A great resource for newcomers and veteran owners.

This Program Book is suppor ted through a generous sponsorship from Management Solutions.

2010 ECHO Annual Seminar Program Book $35.00 Non-Member Price: $45.00 This 300+ page reference book contains the presentation outlines, text and handouts from the sessions at the 2010 ECHO Annual Seminar held on June 19, 2010. It also contains vital information for association directors, such as assessment collection policies, internal dispute policies, and much more.

Dispute Resolution in Homeowner Associations $20.00 Non-Member Price: $25.00 This publication has been completely revised to reflect new requirements resulting from passage of SB 137.

Publications to answer your questions about common interest developments Now Order Online at echo-ca.org

Bookstore Order Form Board Member’s Guide for Contractor Interviews $20.00 Non-Member Price: $25.00

Executive Council of Homeowners 1602 The Alameda, Suite 101, San Jose, CA 95126 Phone: 408-297-3246 Fax: 408-297-3517 TITLE

QUANTITY

This report is a guide for directors and managers to use for interviews with prospective service contractors.

Questions to find out capabilities and willingness of contractors to provide the services being sought are included for most of the contractor skills that associations use.

SUBTOTAL CALIFORNIA SALES TAX (Add 9.25%) TOTAL AMOUNT

Yes! Place my order for the items above.

Board Member’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.

q Check q Visa q Mastercard Credit Card Number Exp. Date

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ECHO Events Calendar

Dates for your calendar Thursday, July 1 North Bay Resource Panel 11:45 a.m.

Contempo Marin Clubhouse 400 Yosemite Rd., San Rafael

Wednesday, July 21 Wine Country Resource Panel 11:45 a.m.

Eugene Burger Mgmt. Co. 6600 Hunter Dr., Rohnert Park

Thursday, September 2 North Bay Resource Panel 11:45 a.m.

Contempo Marin Clubhouse 400 Yosemite Rd., San Rafael

Friday, July 9 East Bay Resource Panel 9:30 a.m.

Angius & Terry 1900 N. California Blvd., Suite 950, Walnut Creek

Wednesday, August 4 Maintenance Resource Panel 12:00 Noon ECHO Office, 1602 The Alameda, San Jose

Friday, September 10 East Bay Resource Panel 9:30 a.m.

Angius & Terry 1990 N. California Blvd., Suite 950, Walnut Creek

Monday, July 12 Accountants Resource Panel 6:00 p.m.

Francesco’s Restaurant Oakland Tuesday, July 13 Central Coast Resource Panel 12:00 Noon Pasatiempo Inn, Santa Cruz Thursday, July 15 San Francisco Luncheon 11:45 a.m.

St. Francis Yacht Club San Francisco

Wednesday, August 11 South Bay Resource Panel 12:00 Noon Il Fornaio 302 S. Market St., San Jose Friday, August 13 East Bay Resource Panel 9:30 a.m.

Angius & Terry 1990 N. California Blvd., Suite 950, Walnut Creek Wednesday, August 18 Wine Country Resource Panel 11:45 a.m.

Eugene Burger Mgmt. Co. 6600 Hunter Dr., Rohnert Park

Saturday, September 25 Central Coast Fall Seminar 8:00 a.m. to 1:00 p.m.

Hilton Santa Cruz, Scotts Valley

Monday, September 13 Accountants Resource Panel 6:00 p.m.

Francesco’s Restaurant Oakland Tuesday, September 14 Central Coast Resource Panel 12:00 Noon Pasatiempo Inn, Santa Cruz Thursday, September 23 San Francisco Luncheon 11:45 a.m.

St. Francis Yacht Club San Francisco

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

38

July 2010 | ECHO Journal

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

Location ECHO Office, San Jose Contempo Marin Clubhouse, San Rafael Angius & Terry, Walnut Creek Francesco’s Restaurant, Oakland Pasatiempo Inn, Santa Cruz Il Fornaio, San Jose Eugene Burger Management Co., Rohnert Park Varies

Lessons from the Field

By John Schneider

The Importance of Periodic Inspections and Proper Oversight of a California HOA ne of the most important challenges facing homeowner associations is the ability to manage and maintain the buildings and common areas in their complex while at the same time limiting their exposure to financial and legal liabilities. This article will discuss how association boards and management companies can create exposure to liability while overseeing a complex and deciding on how to ensure the maintenance, safety, and comfort of the owners.

As a construction consultant, I am often asked by home owner associations to evaluate building components for damage or safety concerns, offer suggestions for scopes of repair, and then facilitate the resolution of construction related disputes. The work includes the investigation of moisture intrusion issues, building and foundation movement, drainage concerns and hazards to pedestrian traffic. The one common element of these evaluations is that most of the damage and hazards observed could have been prevented or minimized had someone made periodic inspections of the building and landscaping of a complex.

Periodically inspecting a complex is the most efficient and economical endeavor an association can undertake to minimize the cost of future repairs and liabilities. Yet, it is almost never done on a regular basis.

Associations and management companies usually wait until there is “visible” evidence of potential damage or a complaint of a hazard before any action is taken. The downside to this approach is that the discovered damage usually necessitates an immediate repair that is not easily executed and an expenditure that has not been planned for.

There is a basic assumption that the casual inspection or review of the landscaping, sprinkler system, pool area, or the exterior lighting, which is often done on a monthly or quarterly basis, fulfills this need. The problem is these inspections are not in-depth

O

reviews of the complex, nor do they reflect the relationship between the multiple components of the buildings or grounds.

Properly done, thorough periodic inspections can provide valuable information on the current condition of a complex as well as the ability to identify conditions that will become problems in the near future. This process can eliminate untimely surprises and will allow associations to plan for the repair of components in an organized manner.

A recent project I was involved with concerned a 40-year old complex consisting of several buildings and mature landscaping with tall redwood trees. Prior to my evaluation of the complex, several home owners complained of cracking to the stucco exterior and to the interior walls and ceilings of their units. These complaints were communicated to both the association and the management company over a three-year period.

The management company advised the unit owners the complex was old, the cracks were due to building settlement, and the damage was not the responsibility of the association to correct. If the home owners wanted the interior damage repaired, they would have to fix it themselves. However, over time the cracking to the exterior of the buildings became obvious and more severe and the association decided to investigate the matter.

Arriving at the site, I initially walked the grounds and viewed the three buildings in question. From a distance there were no apparent signs of damage to the exterior of the buildings that suggested structural damage was occurring; the fractures in the stucco were similar to what would occur in an older building. However, as I got closer to the first building, it was evident the cracking in the stucco was more severe.

The planter areas next to the buildings were covered with ivy, and tall redwood trees shaded the buildings. Brushing away the vegetation and debris from the top of the soil

near one of the buildings large roots from a nearby redwood tree could be seen traveling along the surface of the ground. These roots had extended under the building slab, cracking and lifting the concrete.

Although the roots were clearly visible on the surface of the ground near the base of the tree, no one made the observation that the roots were actually growing underneath the building slabs. It had taken years for these roots to reach the building and cause damage, but they were never identified as a potential problem by anyone from the landscaping company, the management company, or the association board during their periodic reviews of the complex.

Given access to the interior of one of the units, I observed the damage to the walls was obvious and extensive. Cracking was observed at the walls in the entry, living room, kitchen and hallway. I could feel that the floor slab under the carpeting was cracked and lifting. The damage to the unit was unmistakably structural in nature and affected the entire side of the building.

A written report documenting my observations was sent it to the management company. The report recommended that a further evaluation of the affected buildings and slabs be performed by a structural engineer to determine the true extent of the damage and what the scope of repair would entail. I also recommended that an arborist be consulted to determine what should be done with the redwood trees.

The management company’s response to the report was to have a landscaping company cut down two of the redwood trees closest to the damaged buildings. They deferred any further action on the matter, citing the HOA’s budget restraints and held to their belief that the responsibility for repairing the Continued on page 42 ECHO Journal | July 2010

39

ECHO Honor Roll

About

ECHO Honors Volunteers Diane Kay 2010 Volunteer of the Year ECHO Resource Panels Accountant Panel Richard Schnieder, CPA 707-576-7070 Central Coast Panel John Allanson 831-685-0101 East Bay Panel Scott Burke, 650-543-5619 Beth Grimm, 925-746-7177 Legal Panel Mark Wleklinski, Esq. 925-280-1191 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 Bowles Joelyn Carr-Fingerle, CPA John Garvic, Esq., Chair Geri Kennedy, CCAM Wanden Treanor, Esq.

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July 2010 | ECHO Journal

SF Luncheon Speakers John Allanson Jeffrey Barnett, Esq. Tyler 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. Beverly Gordon, CCAM Sandra Gottlieb, Esq. Beth Grimm, Esq. Brian Hebert, Esq. Roy Helsing Stephen Johnson, CFP Julia Lave Johnston Garth Leone Nico March Kerry Mazzoni Thomas Miller, Esq. Larry Pothast Larry Russell, Esq. Steve Saarman Nathaniel Sterling, Esq. Debra Warren, PCAM, CCAM Steven Weil, Esq. Mark Wleklinski, Esq. Glenn Youngling, Esq.

Seminar Speakers January 30, 2010 Marin Seminar Sandra Bonato, Esq. David Feingold, Esq. Wanden Treanor, Esq. Glenn Youngling, Esq.

February 2010 Central Coast Seminar Speakers Sandra Bonato, Esq. Beth Grimm, Esq. Stephanie Hayes, Esq. Donald Odell, Esq. John Schneider March 2010 Wine Country Seminar Speakers Carra Clampett, CCAM Bill Gillis, Esq. Darryl Orr Zeke Ortiz Barbara Zimmerman, Esq.

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 1,450 homeowner associations, you can become an associate member and join 350 other firms serving this important membership.

Benefits of ECHO Membership

Recent ECHO Journal Contributing Authors March 2010 Jeffrey A. Barnett, Esq. Ed Edrosa Sharon Glenn Pratt, Esq. Lise K. Ström, Esq. Richard Tippet April 2010 Tyler P. Berding, Esq. Sandra M. Bonato, Esq. Burt Dean Beth A. Grimm, Esq. Greg Pater

• 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

May 2010 Jeffrey A. Barnett, Esq. Sharon Glenn Pratt, Esq. Kim MacFarlane John R. Schneider Pat Wendleton, Esq. June 2010 Tyler P. Berding, Esq. David Block, Ph.D. John Paul Hanna, Esq. Geri Kennedy, CCAM Ann Rankin, Esq.

Members Non-members/Homeowners Businesses & Professionals

$50 $75 $125

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 408-2973246 or visit the ECHO web site (echo-ca.org) to obtain an application form and for more information.

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ECHO Journal | July 2010

41

Importance of Periodic Inspections Continued from page 39

damage to the interior of the building was up to the individual homeowners.

The decision not to investigate the matter further and the lack of direction from the association board in how this matter was handled raise ethical questions regarding the fiduciary responsibilities for governing and overseeing a CID. To understand the legal responsibilities an association has to manage a complex effectively, I spoke with Don Odell, an East Bay attorney specializing in real estate and construction law.

Mr. Odell began by stating, “Homeowner associations, and particularly their board of directors, face a difficult and often confusing task when dealing with member complaints of damage to individual units. Landscaping, as part of the common area in a development, is owned collectively by the members of the association and therefore falls under the board’s wide managerial umbrella.

Unfortunately, this is an area where competing interests can come into play.”

“The association, through its board of directors, is responsible for the maintenance and repair of the common area owned by the association. If improvements in the common area cause damage to other parts of the common area, the association cannot be held liable for that damage unless it can be established the damage causes some appreciable harm to property or rights owned by the individual owner. In the case of the tree roots, a review of the association’s governing documents must be made to define who owns the damaged property, which would include the structure of the building and the slab it is built upon.”

“However, establishing who is responsible for correcting the damage addresses only part of the legal questions that need to be answered. The more important questions are why this condition was not identified as a potential problem at an earlier date, and whether the board acted properly in its handling of the owner’s complaints.”

Mr. Odell pointed out that had there been proper review and oversight of the landscaping and buildings, or periodic inspections of the complex, the tree roots would have been flagged as a potential issue before any damage to the building could have occurred. By allowing preventable damage to occur, the management company and the association board could be held liable for negligence.

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July 2010 | ECHO Journal

Most association boards are made up of homeowners who volunteer their time and who do not have the specific skills to manage a community association. Because of this, management companies are hired to assist the boards in performing their fiduciary duties. The problem with this relationship is that boards tend to assume that the role of the management company is to fully watch out for the board’s best interests and protect them from liability exposure.

Mr. Odell addressed this fact by referring to Section 7231 of the California Corporations Code, which states that the directors for homeowner associations must be diligent and perform their duties in good faith, in a manner the directors believe to be in the best interest of the corporation and with such care, including reasonable inquiry, as a ordinarily prudent person in a like position would use under similar circumstances.

“In performing that duty, the directors are entitled to rely on information, opinions, or reports prepared by consultants, management companies, or other professionals. In the example of the tree roots, the board hired a management company to manage the development. The management company, presumably with the board’s prior knowledge and consent, removed the trees but then took the position that the unit owner was responsible for fixing the damage to the interior of their units.”

“The decision by the management company to remove the trees was reasonable, and the company’s deferral of repairs to the exterior of the building and slab for budgetary reasons was also objectively reasonable.

However, its position that the unit owner is responsible for the interior repairs is wrong and could subject the association to liability from the unit owners.”

Mr. Odell referred to the California Supreme Court case of Lam den v.La Jolla ShoresCondom inium H om eOwnersAssociation (1999)21 Cal.4th 249, as a case where similar legal issues were considered. In Lamden, termites were found in one of the units. The association’s board of directors, acting on the advice of consultants, including a termite company, decided to treat the infestation locally rather than fumigate the entire building. The impacted unit owner then sued the association, contending that board’s decision not to fumigate the entire building lowered the value of her unit because it left open the prospect that termites may still be living in other areas of the building.

The Supreme Court found in favor of the board after concluding that the directors had rational basis for their decision to spot treat the termites.

Mr. Odell went on to explain, “This basically means if the board acts within the constraints set for it by the applicable laws and decides that, even though responsible for the damages, the association will not repair them, that decision may be upheld by the court, even if that decision has a disproportionally high impact on the unit owner.

Unless the owner can show that their separate property was damaged or that the Board acted improperly, they may not be able to recover those damages from the association.”

“The unit owners in the example of the tree roots face some tough decisions. They have been damaged and need to decide if the damages are worth the time and money to try to recover, and whether or not the association is legally responsible for the repairs.

“The example of the invasive tree roots plainly shows the need for association boards to be involved in the oversight of the association and their need for a clear understanding of the role and responsibilities of a management company or a vendor servicing the complex. The potential liabilities and costs of repairing damage that could have been prevented can be enormous.”

In situations like this, there are no easy answers for who is at fault and who needs to pay for the damages. To make appropriate decisions, associations would be well advised to hire periodically independent experts to evaluate the major components of a complex and suggest options before a condition becomes a liability. A few hundred or even a few thousand dollars spent when a potential problem is first discovered may well save associations hundreds of thousands of dollars in the long run from trying to fix something that could have been prevented if proper supervision had been performed.

John R. Schneider is a licensed general building contractor and a certified Code Specialist. Since 1985, he has been president of All About Homes, Inc., an East Bay consulting company that specializes in the investigation of construction related deficiencies, the management of projects, and the facilitation of disputes between owners, associations, and vendors. He is a member of the ECHO Maintenance Panel. Questions or comments can be directed to Mr. Schneider at jrschneider@allabouthomes.com.

San Francisco Luncheon Thursday, July 15 11:45 a.m. to 2:00 p.m.

It’s Dangerous Out There Election Inspectors and the Politics of Agendas Guest Speaker

Steven S. Weil, Esq. Berding & Weil, LLP

Luncheon Price: $70 Non-Members: $80 Advance Reservations Required for this Event Cell phone use is not permitted inside the St. Francis Yacht Club.

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