Published in the ECHO Journal, July 2010
Lessons From The Field
One 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 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 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.
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 Lamden v. La Jolla Shores Condominium Home Owners Association (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. The Lamden decision, when read with the applicable sections of the Corporations Code, vests the board with the authority to manage and control the association and the common area owned by the association.
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. It also has to be decided whether or not the board’s actions were appropriate in all regards, including the boards apparent lack of landscape maintenance, its hiring and supervising of the management company, and finally its decision not to repair the damages.”
“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, and the stigma of having to disclose un-repaired damage can affect the perceived value of the entire complex.”
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. They should then consult with their attorney to determine what their fiduciary obligations are to make the corrections. 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.