Homeowners Associations (HOA) FAQs (Part 3)

By Andy Sirkin (Part 3 of 3)

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Association Budgeting, Reserve Planning, and Reporting Requirements

What is a homeowners association operating budget?

An HOA operating budget is a projection of the money needed by the association to cover its operating expenses and provide adequate reserves for repair and replacement of the elements of the property the HOA maintains. California law requires that the HOA adopt an operating budget every year. In practice, this means the HOA revises its budget from the previous year to take into account changes in its financial position and cost structure. The governing documents describe the manner in which the HOA budget is adopted each year. In most associations, the governing documents provide that the budget is adopted by the board rather than by a vote of the owners. However, even when the documents give the board the right to adopt the budget, a vote of the owners is required to adopt a budget that would require a large increase in regular assessments (aka owner dues) as discussed below. The HOA must distribute its budget as part of its annual report (also discussed below).

What are regular assessments and how do they relate to the HOA operating budget?

Regular assessments, often referred to as homeowners association dues, are the recurring periodic payments that owners must pay to fund the operation of the association. The regular assessments must be sufficient to cover the operating budget of the association. As with the operating budget, most governing documents allow the board to establish the HOA dues without owner vote; but, as discussed below, non-emergency regular assessment increases of 20% or more (and an operating budget that would trigger this type of increase) must be approved by owner vote.

What is a reserve study and a reserve funding plan?

A reserve study is a careful analysis of the future repair and replacement needs of a homeowners association based on the condition of the elements of the property it maintains, a projection of the remaining useful life of these elements and future cost to repair or replace them, and the amount of money the association has in its reserve fund. A reserve funding plan is an agenda regarding collecting money from the owners through regular and/or special assessments to fund the reserve needs of the association. California requires each HOA to undertake a new reserve study, and make a new reserve funding plan, at least once every three years, unless the current replacement value of the major components the HOA maintains is less than half of the gross budget of the association. The reserve study must include a diligent visual inspection of the accessible portions of the common areas.

Must the HOA hire an expert to perform its reserve study?

The law does not explicitly state that the reserve study must be performed by a qualified expert, but does require that it be reasonably competent and diligent. In practice, the competency requirement probably cannot be satisfied without one or more outside experts, and the board will be exposing its members, and the HOA itself, to a risk of liability to owners and/or mortgage lenders if it does not use an outside expert to perform the reserve study. .

Do very small associations need to have budgets, reserves (and reserve studies), and HOA dues? ?

All of the California laws relating to annual HOA budgeting, reserve studies, reserve funding, and owner assessments apply to all homeowners associations, regardless of size. These means that even very small developments with only two, three or four units or lots must have a formal HOA budget, including repair/replacement reserves, and collect regular assessments from the owners on a recurring periodic basis (rather than on an as needed basis).

What information and reports must the HOA provide to the owners?

Each year, every HOA must prepare two major reports between 30 and 90 days before the end of its fiscal year: an annual budget report, and an annual policy statement.

The major elements of the annual budget report are: (i) the operating budget; (ii) a summary of the reserve study and funding plan, along with an explanation of the procedures used for the calculation and establishment of reserves; (iii) a statement as to whether the board is deferring repairs or replacement of any major component, including a justification for the deferral; (iv) a statement as to whether the board anticipates levying one or more special assessments, including estimated amount, commencement date, and duration of the assessment; (v) a summary of the association’s property, general liability, earthquake, flood, and fidelity insurance policies.

The major elements of the annual policy statement are: (i) the name and address of the person designated to receive official communications to the association; (ii) a statement explaining that a member may submit a request to have notices sent to up to two different?specified addresses; (iii) the location, if any, designated for posting of a general notice that the HOA is giving to owners; (iv) notice of each owner’s option to receive general notices by individual delivery; (v) notice of each owner’s right to receive copies of meeting minutes; (vi) the mailing address for overnight payment of assessments, and a statement of the HOA’s assessment collection policies including its practices in enforcing lien rights or other legal remedies for default in the payment of assessments;?(vii) A statement describing the association’s discipline policy, including any schedule of penalties for violations of the governing documents; (viii) a summary of dispute resolution procedures; and (ix) a summary of requirements for association approval of a physical change to property.

The association may either provide the full annual budget report and annual policy statement to each owner, or provide a general description of the content of the report along with instructions on how to request a complete copy of the report.

What documents and information must the HOA provide to prospective purchasers?

Homeowners associations are not required to provide or disclose any information directly to prospective purchasers of units or lots, but are required to provide a variety of documents to selling owners so that these owners can meet seller disclosure requirements. These include: (i) a copy of all governing documents and, if the association is not incorporated, a statement in writing that the association is not incorporated; (ii) a copy of the most recent annual budget report and annual policy statement, along with a statement of any change in the association’s current regular and special assessments and fees which have been approved by the board, but have not become due and payable; (iii) a true statement as to the amount of the association’ s current regular and special assessments and fees, and any unpaid assessments or monetary fines/penalties owed by the selling owner; (iv) a copy or a summary of any notice previously sent to the selling owner alleging a violation of the governing documents; (v) a statement describing any restriction of rentals; and (vi) if requested by the prospective purchaser, a copy of the minutes of board meetings, excluding meetings held in executive session, conducted over the previous 12 months.
Owner Assessments

Who determines each owner’s share of assessments?

The governing documents always specify how assessments are allocated among the owners, and usually require a high percentage of the owners and the mortgage lenders to approve any change in the allocation. The allocation is established by the developer at the time the governing documents are prepared, and is reviewed by a governmental agency for projects consisting of five or more units or lots. There are no legal grounds for an owner to challenge the assessment allocation based upon fairness or equity.

What is a special assessment, and how is the amount and payment schedule established?

A special assessment is an assessment for an association expense that was under-budgeted or not budgeted. It can be made payable in a single installment or in multiple installments. In general, the board has the power to impose small special assessments and to determine the payment schedule, but some governing documents require owner approval for all special assessments. Even where the governing documents do not require owner approval, special assessments during one year that total more than 5% of the budgeted expenses for that year require owner approval except in emergency circumstances. All owners must be notified of a new or increased special assessment 30-60 days before it is due.

What is a personal reimbursement assessment and how is the amount established?

A personal reimbursement assessment is an assessment against only one owner. The most common type of personal reimbursement assessment is one imposed to reimburse the association for a cost that is a specific owner’s individual responsibility under the governing documents. For example, if an owner or the owner’s guest or tenant damages the common area, the association could levy a personal reimbursement assessment for the repair cost. Another type of personal reimbursement assessment is one imposed as a fine or penalty. Fines and penalties can only be imposed if a schedule had been distributed to all owners in advance, and there has been a notice and hearing (as discussed below in connection with owner discipline).

Can the HOA charge for parking, use of recreational facilities, and other services, and is there an upper limit on these changes?

The board may impose usage and service fees as long as they do not conflict with the governing documents. The amount of the charges must be reasonable.
Assessments Disputes and Collection

What can an owner do if he/she disagrees with the amount of an assessment?

Under most circumstances, if an owner disagrees with the amount of an assessment, he/she can pay it under protest and then challenge the assessment through a court action or arbitration. The exact requirements for challenging an assessment in this way are described in Civil Code §5658. If the owner does not follow these procedures, or simply does not pay the assessment, he/she may lose the right to challenge it and be subject to a collection action and/or foreclosure.

Can an owner reduce his/her assessment by offsetting money the HOA owes him/her?

An owner may not withhold assessments owed to the association on the grounds that the owner is entitled to recover money or damages from the association for some other obligation.

What happens if an owner doesn’t pay an assessment?

If an owner does not pay a regular or special assessment, he/she is subject to a variety of fees and penalties including non-judicial foreclosure, a four-month procedure culminating in an auction-like sale of the delinquent owner’s unit or lot to pay the assessment and the collection costs. In a non-judicial foreclosure, there is no trial or hearing. The procedure can be handled by an attorney or by a specialized assessment collection service.

If an owner does not pay a personal reimbursement assessment levied to reimburse the association for common area damage, non-judicial foreclosure is also possible provided the governing documents authorize it. If an owner does not pay a personal reimbursement assessment levied for any other purpose, the association must collect its funds through a judicial process.

The association is required to have a written statement of policy for collecting delinquent assessments, and to distribute that statement to all owners annually. The policy should require immediate and aggressive action every time an assessment is delinquent. This approach avoids the awkwardness of responding to owners who request additional time to pay, and creating a perception of leniency or inconsistent treatment. Moreover, in cases where the delinquent owner has also defaulted on his/her mortgage, quick action decreases the likelihood that a mortgage foreclosure will prevent the association from collecting the unpaid assessment(s). Sample association notices relating to delinquent assessments are provided in The Condominium Bluebook.

Handling Association Funds

What accounting procedures are required for HOAs?

The law requires that a homeowners association segregate its reserve funds from its operating funds and perform a quarterly financial review. Some governing documents increase the scope or frequency of this review.

The law also requires preparation and distribution of a budget and financial report each year as described under the heading “Association Budgeting, Reserve Planning, and Reporting Requirements” above.

Reserve funds can be used only for repair, restoration, replacement or maintenance of the portions of the property that the association is obligated to maintain, or litigation involving these items. In some circumstances, the association can borrow reserve funds to cover operating expenses, but the reserve funds must generally be replenished within one year.

The board is responsible for fulfilling the association’s accounting responsibilities, but it can delegate this responsibility to an officer, committee, or professional manager provided the board retains final authority.

Can an owner withdraw his/her share of HOA funds when he/she sells?

No owner is entitled to withdraw funds from the association in connection with the sale of his/her unit or lot.

Does an HOA need to pay income tax?

Homeowner associations are required to pay federal and state income tax only if they generate income from sources other than the collection of assessments and fees from the owners, and then only if the income from these other sources, offset by the expenses associated with generating it, exceeds $100. The only non-assessment income most associations generate is interest on association funds. Federal and state income tax is owed on this income to the extent it exceeds $100 per year, but most associations avoid paying tax by carrying forward any potentially taxable income by applying it to the next year’s budget. For additional information, see Internal Revenue Code §528 and Rev. & Tax. Code §23701t.

Maintenance and Alterations

What portions of the property are individual owners obligated to maintain?

In condominium projects and planned developments, maintenance obligations are not necessarily determined by ownership. In other words, the fact that a particular element or area is individually owned does not necessarily mean that it is individually maintained. To determine whether an element or area is individually maintained, begin by reading the sections of the governing documents that specifically discuss maintenance obligations. The maintenance sections may or may not refer back the ownership sections (such as the definition of the condominium unit). If responsibility for the element or area is not clear, attempt to determine the author’s intent by analogy to similar elements or areas that are mentioned in the documents. If the documents provide no clues as to the authors intended allocation of responsibility, determine ownership of the element or area and allocate responsibility based on ownership.

In most condominium projects, individual owners are obligated to maintain the following elements of the property:

• Everything included within the definition of the unit as explained under the heading “What portions of a condominium are individually owned?” above;
• The glass, screens, moving frame, and hardware of windows (even if they do not fall within the definition of the unit);
• All doors, door frames, and door hardware (even if they do not fall within the definition of the unit); and
• The finished wall surfaces of storage spaces assigned as exclusive use or restricted common area.

Where exterior areas such as decks, patios or yards are included as part of a condominium unit or assigned as exclusive use or restricted common area, individual maintenance obligations vary widely, and no generalizations are possible.

In most planned developments, individual owners are obligated to maintain the following elements of the property:

• All interior elements and areas of the homes;
• All portions of the plumbing, electrical, heating and air conditioning systems serving the homes;
• All foundations and structural elements of the homes (but not roofing and siding);
• All glass, screens, moving frame, and hardware of windows; and
• All doors, door frames, and door hardware; and
• All patios and decks (except exterior paint on decks).

As discussed below, owner maintenance obligations change when an element or area is damaged by negligence, or as a consequence of the malfunction of an element the owner is not responsible to maintain.

What standards apply to owner maintenance, and what happens if an owner fails to meet them?

The governing documents usually include a minimum standard for owner maintenance such as the statement “each owner shall maintain the elements of the property for which he/she is responsible in a condition which does not impair the value or desirability of other units or lots”. Most governing documents also provide that if an owner fails to satisfy his/her maintenance requirements, the association may do so and assess any related expense against the responsible owner as a personal reimbursement assessment. It is advisable (and required by some governing documents) that the association provide a written warning, an opportunity to correct the problem, and a board hearing, before undertaking a repair for an owner.

Who maintains things that are on the border of two or more lots?

Maintenance responsibility for elements on the border of lots within a planned development (often called “party walls”) is determined by the governing documents or, where the documents silent on the issue, by general rules of law. In most cases, each of the bordering lot owners is responsible for a percentage of the cost which reflects the extent to which the element serves his/her lot. Any of the bordering lot owners can undertake necessary maintenance, and recover the appropriate share of the costs from the other bordering lot owners.

What portions of the property is the HOA obligated to maintain?

The allocation of maintenance responsibilities between the individual owners and the association is usually determined by the governing documents, and varies widely from project to project. A step-by-step procedure for determining responsibility is discussed above under the heading “What portions of the property are individual owners obligated to maintain?”

In most condominium projects, the association is obligated to maintain the following elements of the property:

• All exterior elements including siding and roofing (but not windows and doors);
• All foundations and other structural elements;
• All landscaping, exterior lighting, drives, and walks;
• All interior common areas including lobbies, hallways and stairs (except stairs connecting levels within units);
• All portions of the plumbing electrical, heating and air conditioning systems serving more than one unit; and
• All fire protection alarms and equipment.

Where exterior areas such as decks, patios or yards are included as part of a condominium unit or assigned as exclusive use or restricted common area, association maintenance obligations vary widely, and no generalizations are possible.

In most planned developments, the association is obligated to maintain the following elements of the property:

• All common area;
• All exterior surfaces of homes, including roofing, siding, trim, decks, balconies, exterior stairs, railings, window frames, and door frames;
• All fences and exterior, nonstructural walls;
• All landscaping on each lot; and
• All fire protection alarms and equipment except smoke detectors within homes.

As discussed below, association maintenance obligations change when an element or area is damaged by negligence, or as a consequence of the malfunction of an element that an owner is responsible to maintain.

Is the HOA required to perform regular inspections of the portions of the property it maintains?

A homeowners association is required to regularly inspect the portions of the property it maintains as part of the reserve study process.

Who is responsible for damage caused by a negligent or intentional action or inaction?

Each Owner is responsible for maintenance necessitated by the negligent or intentional action or inaction of his/her guests, employees and contractors, the occupants of his/her unit (including tenants), and the guests, employees and contractors of these occupants. The association is responsible for maintenance necessitated by the negligent or intentional action or inaction of its employees and contractors.

What is the “point of origin”, and how does it effect maintenance responsibilities?

The term “point of origin” refers to the first event that sets in motion the series of other events leading to a maintenance need. The point of origin of the maintenance need determines responsibility for its cost. For example, if the bathtub of a condominium unit overflows, the owner is responsible for all resulting damage to other units and to the common area. This is true because the point of origin of the damage was either a malfunction of the faucet or drain (elements for which the owner is responsible), or an occupant’s negligence in allowing the tub to overflow (an act for which the owner is responsible).
Improvements and Alterations

Under what circumstances does an owner need HOA approval for an improvement or alteration?

Condominium governing documents usually require association approval for improvements and alterations which:

• Change the appearance of any exterior area;
• Change any interior common area (except entirely separated exclusive use common areas such as storage closets);
• Impair structural integrity; or
• Interfere with plumbing, electrical, heating, or air conditioning service to other units or the common area.

Planned development governing documents usually require association approval for improvements and alterations which:

• Change any common area;
• Involve the construction of new structures or additions, including fences, walls, pools, spas, balconies, patios, patio enclosures, screens, tents, awnings, window air conditioners, exterior shutters, exterior antennas, or exterior wiring;
• Change the appearance of the exterior elements of existing structures including paint, siding and roofing;
• Change the appearance of existing landscaping visible from the common area or other lots;
• Obstruct the view from another lot or from the common area; or
• Interfere with the water supply, sewage or drainage systems.

The law imposes general requirements on HOA alteration approval procedures (Civil Code §§4760 et seq.), and specific restrictions on approval requirements and procedures for display of signs (Civil Code §§712, 713 and 4710), U.S. flags (Civil Code §4705), antennae and satellite dishes (Civil Code §4725), solar panels (Civil Code §714 and 714.1), electric vehicle charging stations (Civil Code §4745), low water-using landscaping (Civil Code §4735), fire-retardant roofing (Civil Code §4720), disability accommodation (Government Code §12927), and operation of a day care facility (Health and Safety Code §1597.40).

Can the HOA legally restrict the display of a sign by an owner?

California law states that an HOA cannot prohibit an owner from displaying a non-commercial sign on or in his/her lot or unit (including from the yard, window, door, balcony, or outside wall) unless the posting or display would create a threat to public health or safety, or would violate a local, state, or federal law. However, an association may prohibit displays made of lights, roofing, siding, paving materials, flora, or balloons, or any other similar building, landscaping, or decorative component, or that include the painting of architectural surfaces. An association can also limit signs and posters that are more than nine square feet in size and flags or banners that are more than 15 square feet in size.

What is the procedure for obtaining HOA approval for an improvement or alteration?

Most governing documents contain detailed procedures for the submittal, consideration, and approval of proposed alterations and improvements. Where the governing documents do not contain these procedures, or where the procedures are incomplete, the board should develop new or supplemental procedures and express them in a written resolution or Rule. If formal approval procedures are not established, or if they are not strictly followed, the association may be prohibited from enforcing its architectural guidelines. Alteration approval is a responsibility of the board, but it may delegate this responsibility to an officer, committee, or professional manager provided it retains final authority.

Civil Code §4765 now imposes the following requirements on HOA alteration approvals:

• The association must provide a fair, reasonable, and expeditious procedure for making its decision. The procedure shall be included in the association’s governing documents. The procedure shall provide for prompt deadlines. The procedure shall state the maximum time for response to an application or a request for reconsideration by the board of directors.
• A decision on a proposed change shall be made in good faith and may not be unreasonable, arbitrary, or capricious.
• A decision on a proposed change shall be consistent with any governing provision of law, including, but not limited to, the Fair Employment and Housing Act.
• A decision on a proposed change shall be in writing. If a proposed change is disapproved, the written decision shall include both an explanation of why the proposed change is disapproved and a description of the procedure for reconsideration of the decision by the board of directors.
• If a proposed change is disapproved, the applicant is entitled to reconsideration by the board of directors of the association that made the decision, at an open meeting of the board. This paragraph does not require reconsideration of a decision that is made by the board of directors or a body that has the same membership as the board of directors.
• The association shall annually provide its members with notice of any requirements for association approval of physical changes to property. The notice shall describe the types of changes that require association approval and shall include a copy of the procedure used to review and approve or disapprove a proposed change.

Architectural approval procedures should also contain the following elements:

• A list of the items required before the association will consider the application, which would typically include:
• A description of the proposed alteration, including, as appropriate, its shape, height, width, elevation, materials, color, location and such further information as may be necessary to allow the association to evaluate it fully;
• A set of construction drawings prepared by a licensed architect and/or engineer; and
• A certificate by a licensed architect or engineer stating that the alteration (i) will not impair the structural integrity of any part of the property, and (ii) will not interfere with any mechanical system;
• A provision allowing the association to make any reasonable request for additional information or details;
• Guidelines regarding the time limit for completion of the work, obtaining an extension, and consequences for failing to complete the work on time; and
• Guidelines regarding licensing, bonding, and insurance of a contractor hired to complete approved alterations.

What standards and principles must the HOA follow in approving or disapproving an alteration or improvement?

Homeowners associations are granted the same wide latitude ordinarily given government agencies in their decision making. It is appropriate for a homeowners association to base its decision regarding a proposed alteration or improvement on subjective criteria provided that the decision is:

• Based upon a reasonable investigation;
• Intended to serve the best interests of the association and the owners as a group;
• Reasonable in light of the information available at the time the decision is made;
• Fair and non-discriminatory;
• Made in good faith; and
• Within the scope of the association’s authority under the governing documents and the law.

The fact that the association has permitted or approved a certain activity or alteration by a particular owner at one time does not mean that the association must permit or approve that same activity by the same or a different owner at a later time.

What happens if owner makes alterations or improvements without required HOA approval?

When an owner begins alterations or improvements without required association approval, he/she is subject to a variety of penalties under the governing documents and the law. At a minimum, the association can order the owner to immediately cease all work and restore any altered areas to their original state. If the owner does not comply, the association can perform the restoration and assess the costs against the owner. The board has the power to undertake these actions, but may delegate responsibility to an officer, committee, or professional manager provided the board retains final authority. If the association does not act, it may find it more difficult to enforce similar restrictions in the future.

Each association should have written policies for discovering and responding to violations of alteration restrictions. These should include:

• The right to enter any unit or lot, following reasonable notice, to inspect all construction, whether or not approval was required or granted;
• A requirement that the association notify the owner of the violation in writing, and order the owner to cease work and restore the altered area within a prescribed time period;
• A procedure for the owner to obtain a hearing before the board if the owner wishes to argue that approval was not required, or that the work complies with an approval that the owner obtained; and
• A requirement that if the owner fails to remedy the situation by the deadline, the association must undertake the work and assess the costs against the owner.

Defects and Disclosures

What can an individual owner do about construction defects?

When an owner discovers construction defects in a portion of the property which the association is obligated to maintain, he/she should report the problem to the manager or, if there is no manager, to an association officer or director. The association is obligated to repair the damage under the governing documents, regardless of whether the developer is ultimately responsible. The board is required to exercise prudent business judgement in deciding whether to attempt to recover repair costs from the developer.

When an owner discovers construction defects in a portion of the property which the owner is obligated to maintain, he/she must repair the damage under the governing documents. The repair obligation exists regardless of whether the developer is ultimately responsible, or whether a previous owner or real estate agent has violated disclosure laws. If the owner fails to repair, the association may do so and assess the costs against the owner. The owner may be entitled to recover his/her repair costs from the developer, a previous owner, or a real estate agent, and should consult an attorney.

What should the HOA do if there are construction defects in the project?

A homeowners association should consult an attorney as soon as it discovers construction defects. Failing to act quickly could result in the loss of recovery rights. The law contains extensive requirements and procedures for construction defect dispute resolution.

What disclosures must be made to a prospective purchaser when there are construction defects in the project?

The seller of a unit or lot is required by law to disclose all material defects in the property, including defects located in the common area, and defects located in other units or lots if they affect the unit or lot being sold. The disclosure requirements extend to all defects of which the seller is aware or should be aware, including construction defects. Additional disclosure requirements apply when construction defect litigation has been commenced, or is under consideration.

Any real estate agent involved in the sale is also required to disclose any defects of which he/she is aware or should be aware, and is further required to conduct a reasonably competent and diligent visual inspection.

Homeowners associations are not required to provide or disclose construction defect information to prospective purchasers of units or lots.

Insurance and Liability

Property Insurance

Who is responsible for insuring the homes and the common areas for property damage?

The governing documents contain detailed property insurance requirements. In condominium projects, these typically require that the association obtain property damage insurance (sometimes called casualty insurance) for everything located on the property except the contents of the units. These policies usually cover damage to interior walls, floors and ceilings within units, but do not cover damage to cabinetry, plumbing and electrical fixtures, appliances, wall and floor coverings, and furniture. The individual owners are responsible for insuring the contents of their units, and are required to carry this insurance in some projects.

In planned developments, the governing documents usually require the association to insure all portions of the property which it is obligated to maintain. But in some cases, the individual owners are required to insure everything on their lots even though the exterior surfaces of the homes are maintained by the association.

Are there minimum requirements for the amount of property insurance that must be carried?

The law does not require a particular amount or type of property insurance. Most governing documents include a minimum insurance requirement by stating that the limits of coverage shall not be less than the full current replacement cost of the structures. In other cases, the documents allow the board to determine the appropriate amount of insurance. Regardless of what the documents say, the board is empowered to exceed any minimum insurance requirement, and must use prudent business judgement in determining the amount and type of insurance.

Is earthquake insurance required?

Most governing documents do not require earthquake insurance, and it is not required by law. Since earthquake insurance is expensive and typically involves a large deductible, its benefits are debatable, and a board should not face liability for choosing not to obtain it.

How can an owner find out what insurance the HOA is carrying?

Homeowners associations are required to provide a summary of the terms of all of their insurance policies to each owner each year, and to provide complete copies of the policies upon request.

What happens if there is not enough property insurance to cover repair costs?

In general, when insurance proceeds are insufficient to pay repair costs, the association must levy a special assessment to cover the shortfall. But most governing documents describe a procedure for dissolving the association and selling the property following a very large uninsured or underinsured loss. These procedures are intended to provide an alternative to a special assessment so large that most owners could not pay it.
Bonds

What are managing agent bonds and fidelity bonds, and when are they required?

Managing agent bonds and fidelity bonds are a form of insurance for the theft or misappropriation of funds. This type of insurance is not required by law, but is required by some governing documents. It is advisable for large associations to obtain this type insurance unless their funds are handled by a professional manager who already has adequate bonding or coverage.

Liability and Liability Insurance

Under what circumstances can HOA directors and officers be held liable for damages resulting from their service?

The law provides that avolunteerdirector or officer cannot be held liable for damages resulting from his/her service to the association if he/she performs his/her duties (i) in good faith, (ii) in a manner which he/she believes to be in the best interests of the association, and (iii) with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use in similar circumstances. At the risk of oversimplifying this standard, the idea is to protect honest directors and officers from liability for mistakes unless their actions are self-interested or unreasonable. Director are entitled to rely on information and opinions provided by the association’s officers, committees, and hired experts.

To provide additional liability protection to directors and officers, most governing documents state that the association will indemnify them absent gross negligence, intentional misconduct, or fraud. Indemnity means that the association will pay for an attorney to defend the director or officer, and will pay the damages if the defense fails. Most governing documents require the association to carry director and officer (“D&O”) liability insurance for these costs, and such insurance is always a good idea. The law states that if the D&O insurance meets statutory minimums, the director or officer cannot be held personally liable even if the damages exceed the insurance coverage.

Under what circumstances can an owner be held liable for personal injuries that occur in another home or in the common area?

If the association is incorporated, an individual owner can never be held responsible for personal injuries that occur in another owner’s home or in the common area. If the association is unincorporated, an individual owner can be held responsible only if the association is responsible and unable to satisfy the claim, and then only if the association does not carry liability insurance meeting the statutory minimums.

Under what circumstances can an owner be held responsible for unpaid HOA debts?

If the association is incorporated, an individual owner can never be held responsible for its debts. If the association is unincorporated, an individual owner can be held responsible only if the debts are unrelated to construction or repair.

Who is responsible for insuring the HOA, the owners, the directors and the officers, for liability?

The governing documents contain detailed liability insurance requirements. These typically mandate liability insurance for the association and its directors and officers. The owners are responsible for insuring against their own liability.

Are there minimum requirements for HOA liability insurance?

The law does not require a minimum amount of liability insurance, but most governing documents specify minimum policy limits. The law does state that if certain statutory policy limits are met, the individual owners cannot be held responsible if the damages exceed the coverage.
Usage Restrictions

Can the HOA limit the type or number of people who can live in a home?

Statutory law explicitly prohibits housing discrimination based upon sex, race, color, religion, ancestry, national origin, and disability, and the California Supreme Court, finding that this list of protected classes is “illustrative rather than restrictive”, has held that discrimination against children, and against families because they have children, is also prohibited. The law against discrimination is so broad that any occupancy restriction could be interpreted as discriminatory, including limits on the maximum number of occupants in a home. The only limitations that are clearly valid and enforceable are those that track the language of local and state health codes, and those that establish a project as senior citizen housing.

Can an owner be forced to give up his/her pet?

Governing documents which were created or amended after January 1, 2001 must allow each owner to keep at least one pet, and cannot prohibit an owner from keeping a pet he/she already has. Beyond this basic requirement, however, pet restrictions in governing documents are valid and enforceable, and an owner in violation of the restrictions can be forced to give up his/her pet.

Who is responsible for a tenant’s compliance with the governing documents?

An owner is responsible for his/her tenant’s compliance with the governing documents, and can be fined or penalized for the tenant’s violations. Any owner who rents his/her unit should have a written rental agreement incorporating all of the governing document usage restrictions, and making the tenancy subject to any additional restrictions that are enacted by the association during the rental term.
Mortgages and Liens

What happens to the HOA and the other owners if an owner defaults on his/her mortgage?

When an owner defaults on his/her mortgage, the lender is entitled to undertake a foreclosure procedure that ultimately results in an auction-like sale of the defaulting owner’s unit. The lender has no recourse against the association or any other owner. The purchaser at the foreclosure sale must comply with all of the provisions of the governing documents, including the obligation to pay assessments. But a foreclosure sale purchaser is not responsible for any unpaid, pre-foreclosure assessments.

What is the purpose of the “mortgage protection” provisions of the governing documents?

Most lenders will refuse to make mortgage loans on homes within condominium projects and planned developments unless there are special provisions in the governing documents to protect them. These provisions are designed to insure that the basic rights and responsibilities associated with the home at the time the loan is made cannot be easily changed. The lender is particularly concerned about changes that might de-value the home such as an increase in the home’s assessment allocation, the removal of a parking or storage space, or an uninsured or underinsured loss. Most lenders review the mortgage protection provisions of the governing documents before they approve a mortgage within a condominium project or planned development.

What is a mechanics lien, and what happens if one is placed against a unit or lot?

The term “mechanics lien” describes a document that can be recorded with county government by an unpaid contractor or construction materials supplier. The recording of a mechanics lien relating to a particular property effectively prevents the owner from selling or refinancing the property without either paying the bill or establishing in court that the lien is invalid. When construction is performed for an individual owner on his/her condominium unit or planned development lot, the owner’s contractors and construction materials suppliers can record mechanics liens against that owner’s unit or lot, but cannot record mechanics liens against the common area or against any other owner’s unit or lot. When construction is performed for the association on the common area, the association’s contractors and construction materials suppliers can record mechanics liens against the common area and every unit or lot. An owner who learns that a mechanic’s lien has been recorded against his/her unit or lot should consult an attorney.

Enforcement and Disputes

Disputes Between An Owner and the HOA

How should the board proceed if it learns of a violation of the governing documents?

It is generally the best practice if the association acts each time an owner violates the governing documents. When HOAs ignore minor owner violations, it signals that repeated minor violations, or more significant violations, will be tolerated, and generally leads to more problems in the end. When it comes to governing document enforcement, it generally does not pay to be tolerant.

When an HOA board is to meet to consider discipline of an owner, including imposing a fine, monetary charge, or reimbursement assessment, it must notify the owner in writing at least 10 days prior to the meeting.?The notice must contain the date, time, and place of the meeting, the nature of the alleged?violation, and a statement that the owner has a right to attend and may address the board at the meeting. The board must meet in executive session if requested by the owner. If the board imposes discipline, it must provide a written notice within 15 days of the action.

What is “internal dispute resolution”, and when is it required?

California law requires that owners who have a dispute with the association be given the opportunity to meet and confer with a representative of the board to attempt to resolve the dispute, and imposes detailed requirements for this procedure.

What are mediation and arbitration, and when are they required?

Mediation and arbitration are methods of alternative dispute resolution (“ADR”). Their purpose is to save time and money by resolving disputes without going to court. Mediation involves a neutral person who attempts to help the parties resolve their dispute through discussion and compromise. A mediator does not make rulings or decisions. Consequently, mediation is always informal and non-binding. Arbitration involves a neutral person who acts as a surrogate judge. An arbitrator considers the position of each side, and the applicable law, then makes a ruling. The parties decide in advance whether the ruling will be binding or non-binding.

Most governing documents require some form of ADR, but there is wide variation regarding the type of ADR required and the situations where the requirement applies. Regardless of what the governing documents say about ADR, there are certain circumstances when the law requires at least an attempt at ADR as a prerequisite to beginning any legal process.

Who pays the attorneys fees in a dispute between an owner and the HOA?

The law provides that in any legal action brought by an owner, or by a homeowners association, to enforce the provisions of the governing documents, the prevailing party shall be entitled to recover his/her attorney’s fees and costs, provided they are reasonable. Some governing documents broaden the right to recover attorney’s fees and costs so that it applies in all disputes relating to the property, including those that do not involve enforcement of the governing documents. In all instances where a right to recover attorney’s fees exists, it will apply in arbitration as well as in court.

Disputes Between Individual Owners

Is the HOA legally required to enforce the documents?

In general, homeowners associations have discretion whether or not to enforce the governing documents. This discretion is removed, and enforcement mandatory, in instances where the governing documents explicitly require association action. But regardless of whether enforcement is mandatory, it is usually advisable for the association in act in order to avoid future enforcement problems.

How can an owner act independently to enforce the documents against another owner?

Each owner in a condominium project or planned development has the right to independently enforce the governing documents against any other owner. The mechanism for enforcement is either the court system or alternative dispute resolution depending on the nature of the violation and the dispute resolution provisions of the governing documents. Owners interested in pursuing an enforcement action should consult an attorney.

Are there alternative dispute resolution requirements applicable to owner disputes?

Alternative dispute resolution requirements imposed by law, and those imposed by the governing documents, are applicable to owner disputes. For a general discussion of alternative dispute resolution requirements, refer to the question “What are mediation and arbitration, and when are they mandatory?” above.

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About the Author

Andrew Sirkin is a recognized expert in fractional ownership and other co-ownership arrangements including shared vacation homes, TICs, equity sharing, co-housing, and legal subdivisions such as condominiums. His practice areas include transaction planning, offering materials, co-ownership agreements and CC&Rs, entity formations, regulatory approvals, fractional lending and mediation. From offices in San Francisco California and Paris France, he has worked on projects all over the World, including most U.S. States, as well as Morocco, Italy, France, Spain, Portugal, Ireland, Argentina, Nicaragua, Costa Rica, Panama, Dominican Republic, St. Kitts/Nevis, Barbados, Bahamas, Nicaragua, Belize and Mexico. Since 1985, he has prepared fractional ownership documentation for over 6,000 clients. He is an accredited instructor with the California Department of Real Estate, and frequently conducts co-ownership workshops for attorneys, real estate agents, corporations, and prospective home buyers. Andy is an original co-author of The Condominium Bluebook, published annually by Piedmont Press, and The Equity Sharing Manual, first published by John Wiley and Sons in November 1994 (order the book). He has written numerous articles on related topics, including “Fractional Ownership” and “Questions and Answers on Tenancy In Common”, all of which are available at www.andysirkin.com. Mr. Sirkin can be contacted via the contact form.