2016 HOA Legislation & Case Law Review

In 2017, California HOAs will feel the impact of new California laws, federal laws, and court decisions.

Recent legal developments affect community association interests in a variety of ways. In 2016, the California Court of Appeal decided several cases concerning such issues as title to common area, board member liability, and attorney’s fees, among others, which may be instructive to board members and managers. Meanwhile, on the legislative front, new and pending laws affect association interests in the realms of governance, business dealing, FHA certification, annual notifications, and use restrictions. Though not a complete or authoritative guide, we hope this article can be a useful resource for you on the most relevant legal updates this year.

California & Federal Legislation

Governance issues ranged from an association’s maintenance responsibility to discriminatory conduct.

Assembly Bill 968 Clarifies Owner and Association Responsibilities

Assembly Bill 968 which replaces the current language of Civil Code Section 4775, is the legislature’s clarification on the respective maintenance, repair, and replacement obligations of owners and associations with regard to exclusive use common areas. Effective January 1, 2017, the new language of Section 4775 makes clear that an owner is responsible for: maintaining his or her exclusive use common area and that the association is responsible for repairing and replacing it, unless the association’s CC&Rs say otherwise. This update to the statute was not intended to change the current law, but merely to clarify the language, which has often been misinterpreted by associations. Of course, if your association’s CC&Rs already address the maintenance obligations for these areas, this new language will not have any effect, as such provisions would trump the Civil Code provisions, which function more as fallback provisions for associations whose CC&Rs do not address maintenance responsibilities for these areas/components. If your association has been relying on a different interpretation of the current language of Section 4775, now would be a good time for an amendment to the CC&Rs if the association wants to keep its historical maintenance scheme in place.

FHA Requires HOAs to Address Discriminatory Conduct

As of October 14, 2016, a Fair Housing Act amendment imposes potential liability on associations for failure to address any discriminatory conduct or harassment by its residents if the association had the power to correct such conduct. The Federal Fair Housing Act prohibits discrimination in housing and housing-related services due to race, color, religion, sex, national origin, disability, and familial status (42 U.S.C. 3601 et seq.). As amended, the Fair Housing Act holds associations directly liable for failing to take prompt action to end any third party’s discriminatory housing practice if the association (1) knew or should have known about it and (2) had the power to correct it.[1]  If a manager or the board receives a complaint concerning possible discriminatory behavior being carried out by an owner or resident in the community, the board has a duty to investigate the complaint, even if it ultimately determines that no action is warranted. In light of the association’s potential liability and the sensitivity of the situation, if an association receives an allegation of discriminatory conduct, it would do well to contact legal counsel for guidance.

Rising Minimum Wage May Impact Vendor Prices

Recent legislation increasing the minimum wage in California incrementally over the next several years may impact an association’s existing and future vendor contracts.[2] As of January 1, 2017, the minimum wage increases to $11.00 per hour and it will climb incrementally each year until it hits $15.00 per hour in 2022. The combined effect of this rise represents a 50% increase in the statewide minimum wage over its current level. For associations, the biggest potential impact will be on its existing and future vendor contracts. Many vendors serving associations rely heavily on minimum wage employees, so a 50% rise represents a considerable cost for any vendor to absorb. As a result, these vendors will ultimately pass along their higher labor costs to the associations they serve through increased contract prices. Accordingly, association boards should discuss potential cost increases with vendors to determine the extent to which these increased costs should be addressed in annual budget planning.

Severe Penalties for Using Unregistered Janitorial Services

Managers and associations should also be aware that, effective July 1, 2018,  any association that contracts for janitorial services with an employer/vendor that is not registered with the Labor Commissioner is subject to a severe fine, pursuant to Assembly Bill 1978.[3] Under Labor Code §§ 1420–34, which have been added to the code, the fine for a first offense ranges from $2,000 to $10,000, and any subsequent violation exposes the association to a fine ranging between $10,000 to $25,000. In light of these fines, a registration check will be an important step in the due diligence process before contracting for janitorial services. Of course, if your association directly employs custodial workers or your management company provides such services, your association or management company will need to comply with the registration requirements itself.  Under that circumstance the association should require documentation that establishes satisfaction of the legal requirement of registration.

Owners Must Provide Current Address Annually

Beginning in 2017, every association will be required to solicit its members for their contact information and property status. On January 1, 2017, newly enacted Civil Code Section 4041 will require each association to solicit its members for (1) the mailing address where notices from the association are to be delivered; (2) any secondary address where notices from the association are to be delivered; (3) the name and address of each member’s legal representative, if any, or other person who can be contacted in case of the member’s extended absence; and (4) whether the member’s property is owner-occupied, rented, vacant, or undeveloped land.[4]

Although the statute does not mention how often an association must solicit this information, it does state that each member is responsible for providing it on an annual basis. At the very least, the Association will need to solicit such information before such time as it is required to send out the required annual disclosures. In the likely scenario that some (or many) members do not provide this information, such members’ onsite mailing addresses are deemed the proper address for the association to deliver notices to, according to the law. While the association is required to solicit this information, it is the member’s responsibility to provide correct and current contact information.

FHA Certification Processes Streamlined

On July 29, 2016, the Housing Opportunity Through Modernization Act of 2016 became effective as Public Law 114–201. This body of law affects an association’s ability to receive and maintain its FHA certification in four key ways: (1)  reducing the number of units that must be owner occupied from 50% to 35%, unless the FHA can justify a larger percentage; (2) requiring HUD to extend financing to associations notwithstanding its use of transfer or moving fees; (3) requiring the FHA to take up new measures to streamline the recertification process, such as lengthening the time between recertification from 2 to 3 years and allowing associations to recertify by updating previously submitted information instead of resubmitting a new certification application; and (4) allowing mixed-used developments more flexibility in obtaining exemptions concerning the amount of floor space dedicated to commercial purposes. Now, when HUD determines whether to issue an exemption, it must consider economic factors related to the local economy where the development is located.

This legislation should loosen FHA certification requirements and allow for associations with high rental occupancy percentages to none the less obtain certification for FHA loans. To what extent is still unclear as the FHA is in the process of responding to these new requirements. The potential downside is that this change could allow for and result in higher numbers of renter occupied units in those communities without rental restrictions in place, which can, as we all know, create issues for associations. Boards and managers should stay current on the impending changes to the FHA’s requirements, and those communities without rental restrictions may want to consider amending their documents to put restrictions in place.

Potential Federal Override of HAM Radio Bans

On the horizon, pending legislation would forbid associations from imposing an outright ban on antenna structures used for amateur radio communications. The Amateur Radio Parity Act of 2015 recently passed through the House of Representatives and is currently pending in the Senate. The law, if enacted, would protect owners’ rights to construct and maintain ham radio antennas on their separate interests.  Though associations would not be able to prohibit such structures on separate interests, they would still be able to impose reasonable rules governing an antenna’s height, location, size, and aesthetic impact, and to prohibit the installation and maintenance of such structure on common areas.  If your association does not currently have architectural guidelines or rules and regulations in place that could protect the association without trampling homeowner rights, now would be the perfect time to start that project so that the Association is ready to comply when that piece of legislation is enacted.

Possible New Tax Break for HOA Owners

A new proposed law was recently introduced into the House of Representatives, which if approved could give homeowners in community associations a tax break.  The HOME (Helping Our Middle-Income Earners) Act proposes to allow owners to deduct up to $5,000 a year for qualified assessments from their federal tax filings.[5] Under the HOME Act, single filers earning less than $115,000 annually and joint filers earning less than $150,000 annually would qualify for the deduction. This deduction would apply for assessments that (1) are mandatory, (2) are regularly occurring, (3) exist solely because of the owner’s required membership in the association (4) directly benefit the owner’s residence, and (5) are applied to the owner’s principal residence. Note that the deduction does not apply for assessments on an owner’s vacation or rental home. While any tax break is welcome, many commentators believe the HOME Act has little chance of being enacted at this time, though it is something to keep an eye on.

California Case Law

In 2016, the California Court of Appeal decided a handful of cases affecting community associations which may be instructive for boards and managers.

Owners Cannot Acquire Title to Common Areas

In Nellie Gail Ranch Owners Association v. McMullin, a California court of appeal held that a homeowner cannot acquire legal title to association common area by adverse possession because no single owner pays all property taxes assessed on it. In McMullin, the owners built a retaining wall on common area and sued for title to the land under a claim by adverse possession. Under California law, a person may acquire legal title to another’s land without paying for it if that person can demonstrate to the court certain key requirements, including that the person who has claimed right to the land openly occupied the disputed land continually for five years, and that that person paid property taxes on the disputed property. 

In Nellie Gail, the property tax requirement ruined the McMullins’ claim because as owners of a separate interest in the Association, the McMullins did not pay all property tax assessed on the disputed common area. Property tax on common area is not seperately assessed. Instead, it is reflected in each owner’s individual property tax because this tax assesment includes both the value of the owner’s separate interest and the value of the owner’s proportionate, undivided share of the common area. Unless any single owner pays all property tax assessed on common area, any similar adverse possession claims are bound to fail. This is good news for associations who are concerned that they may have lost the right to reclaim common areas that have been claimed and used by individual owners.

Limits of the Business Judgement Rule

The Business Judgment Rule generally shields board members from liability for acts taken pursuant to their official duties. However, Palm Springs Villas II Homeowners Association, Inc. v. Parth establishes that even the robust protection of the Business Judgment Rule has its limits. In Parth, the Association claimed its President, Erna Parth, engaged in multiple actions that were detrimental to its interests and breached her fiduciary duties by taking a number of actions that were outside of her authority, such as signing promissory notes on behalf of the Association without member approval and unilaterally entering into contracts on the Association’s behalf.

Parth argued the fiduciary duty claim against her should be dismissed because she was protected by the Business Judgment Rule, which shields a director from errors in judgment where that director is (1) disinterested and independent; (2) acting in good faith; and (3) reasonably diligent in informing herself of the facts. Though the trial court agreed with Parth, the court of appeal reversed that decision and held the Business Judgment Rule does not shield a board member who fails to exercise reasonable diligence or act within the scope of his or her authority as granted by an association’s governing documents. In other words, the Parth case shows that Board members are not permitted to ignore or claim ignorance of their duties and the limits of their authority, then rely on the protection of the Business Judgment Rule.

The Importance of Participating in ADR 

The case of Rancho Mirage Country Club Homeowners Ass’n v. Hazelbaker demonstrates the court’s backing of the public policy favoring resolution of disputes outside of litigation through alternative dispute resolution (ADR). In Hazelbaker, there was a dispute between the association and the Hazelbakers over architectural approval for patio modifications, which the parties sought to resolve through mediation. Though an agreement was reached in mediation, it was later breached by the Hazelbakers causing the Association to sue to enforce the terms of the agreement.  During litigation a second agreement was reached which resulted in the Hazelbaker’s compliance, however the parties were unable to agree upon whether the Hazelbakers should pay the Association’s attorney’s fees. The court ultimately awarded the Association its attorneys’ fees, reasoning that although the Association’s suit was officially to enforce a settlement agreement, it was, in essence, an attempt to enforce the Association’s governing documents. Thus, under California Civil Code § 5975(c), the Association was entitled to recover its attorney’s fees. This decision shows the importance of participating in ADR, as courts, as was the case with this court, will likely look favorably on such participation if the Association is later forced to litigate.

Attorneys Fees Recovered in Rules Enforcement Case

Another case concerning attorney’s fees is Almanor Lakeside Almanor Lakeside Villas Owners Association v. Carson, et al. In Almanor, the Association sued to enforce fines for governing document violations by the Carsons.  The court ruled in favor of the Association, though it did significantly reduce the amount of the fines the Association recovered. In addition to the fines, the court also awarded the Association over $100,000 in attorneys’ fees as the prevailing party. The Carsons argued they were actually the prevailing party, and thus should have been awarded their fees because the Association failed to collect the full amount of the fines showing that the Association’s fines and fees were based on unreasonable restrictions. However, on appeal, the appellate court affirmed that the Association was indeed the prevailing party and entitled to recover its attorney’s fees and confirmed the Association’s authority to promulgate and enforce reasonable rules and restrictions.

Personal Vendettas Get Expensive

Finally, Boswell v. The Retreat Community Association is a general reminder that when a personal vendetta sours into a lawsuit, it becomes the association’s headache. This suit stemmed from a personal feud between Boswell and the Association’s President that began when Boswell performed unapproved construction work at his residence. This feud spilled over into a smear campaign and general nastiness on both sides. Predictably, a lawsuit ensued, with Boswell alleging 19 instances of intentional infliction of emotional distress, and the Association responding with an Anti-SLAPP motion (which prevents law suits intended to stifle protected/free speech). In the end, the court decided that only 14 of the incidents involved protected speech and that Boswell had a chance of succeeding on the remaining claims. Still, because the Association prevailed on the 14 other instances, the Association was deemed the prevailing party and awarded its attorney’s fees. This case should serve as a good lesson and reminder to boards and managers not to let their personal interactions turn into vendettas that drag their associations into costly litigation.