Published in the ECHO Journal, November 2013
This article addresses ten real-life examples of situations faced by boards of directors. Not all decisions are easy. Be careful not to ignore a problem and hope it will go away. In this litigious world, if you have a question, seek advice. Surround the board with competent advisors. This will make your job easier. Sometimes, good intentions go bad. When things go wrong, there are always lessons to be learned. Read on.
Scenario #1
In an attempt to save money and time, the board hires one of the board members to install windows at a 100 unit condominium complex. The job is estimated to cost $300,000. Final bill comes in at $375,000. Special assessment amount of $3,000 per unit is not enough. The board has to ask for more money. Irate members look into what happened. They discover that board did not bid the job, and there was a conflict of interest. Homeowners sue board for breach of fiduciary duty and negligence.
What went wrong?
This board had been self-managed for 15 years. The board was simply not aware that it was doing anything wrong. Prudent business practice would have been to obtain three bids for the job and to stay away from hiring a board member to do the work.
Lesson to be learned:
Board members must educate themselves concerning homeowner issues. They can do this by reading informative sources such as the ECHO Journal and by attending seminars. They need to be aware of current issues facing boards, what to look out for and how to avoid mistakes like this one.
Scenario #2
A condominium complex has private streets that intersect with public streets. At one such intersection a car was making a right-hand turn. The line of sight of the driver was blocked by a tree and bushes that were growing on the corner. The car hit a 10-year-old on a bicycle. The child died of multiple head and internal injuries.
What went wrong?
The board did not have regular landscape walkthroughs to view the property.
Lesson to be learned:
Do periodic, regularly scheduled landscape walkthroughs to discover any situation that needs attention. Particularly, view landscape areas that impair driving or create visibility hazards. Correct them immediately as a matter of safety. In addition the association should maintain adequate insurance. Consult a knowledgeable insurance broker about your insurance needs.
Scenario #3
A homeowner in one association complains that there are inadequate barriers in and around the tot lot. Young children can easily escape the reach of parents and wander into the street. The association board ignores the complaints or does not act to investigate or remedy the situation. A young toddler runs out of the tot lot, wanders into the street and suffers permanent, serious injuries. The association gets sued for $2 million and settles for $1 million.
What went wrong?
The board should listen to homeowner complaints and investigate to determine if they are legitimate and then take steps to remedy the situation. The excuse in this case that there was no money to install a fence around the tot lot did not fly with the parents of the seriously injured child. The board only had $1 million of insurance; however, the association was protected under the Civil Code and the excess judgment could not be collected against it. The association’s insurance was later cancelled and new insurance cost tripled.
Lesson to be learned:
Do an annual “risk management” survey. Evaluate potential risks around the entire association complex and take steps to alleviate them. Maintain adequate insurance!
Scenario #4
In a multi-story stock cooperative, there was a clause in their bylaws that all people who wanted to reside in the building had to be interviewed. A couple appeared. One person was in a wheelchair. They planned on moving into a unit on the fourth floor. The board casually mentioned that if there were a fire or emergency, there was no elevator and this might be a problem. The couple sued for discrimination.
What went wrong?
The prospective homeowners were “testers” and looking for a reason to sue. The board members should have never made this comment, even it were true.
Lesson to be learned:
Stop interviewing. Be careful of any comments that could be interpreted as discriminatory or derogatory. Be aware of current laws concerning discrimination in housing and disabilities.
Scenario #5
A thirty-year old common interest development has 200 single family houses. The association owns the streets. Sidewalks are uneven because of trees. An individual slips and falls on the uneven sidewalk and broke her ankle. The board says the association is not responsible and that it doesn’t have the money to fix the sidewalks. Individual sues.
What went wrong?
The board failed to maintain the sidewalks. Thus it was negligent in its duty to maintain the common area.
Lesson to be learned:
Maintain the common areas. Deferred maintenance can create risks that are not worth the gamble. If there is insufficient money, bite the bullet and initiate a specially assessment.
Scenario #6
The board of a condominium association removes a tree in front of a unit but does not contact homeowner to tell her. The homeowner claims her right to privacy had been violated.
What went wrong?
The homeowner felt slighted by the board’s action and felt the board should have notified her of planned action. She believed that the right to privacy was a “property” right.
Lesson to be learned:
Although the board had the authority to take out the tree, the board should have notified the homeowner before removal, so that she could state her position. Remember: a board must maintain good public relations so that homeowners do not feel at the mercy of the board.
Scenario #7
Board member “X” is incommunicado for weeks. Other board members do not like this member and they want to replace him. Board member “X” comes alive and insists that he remain on the board. The board refused and turmoil and dissention ensued. The situation leads to recall.
What went wrong?
The board needed to read its bylaws to ascertain the procedure for declaring a vacancy.
Lesson to be learned:
Before taking any action, consult your governing documents and the law that governs your non-profit corporation. Follow the procedure that is required; do not make any exceptions.
Scenario #8
A CID of 200 homes was built in 1992. Leaky windows cause damage. The developer convinces the association board not to sue him, promising that he will attempt repairs. But the developer never repairs. The association filed a lawsuit in 2003. The Court says that the developer dissuaded the board from suing and dismissed the lawsuit.
What went wrong?
The board trusted the developer to repair and he “strung” the board along until the 10 year statute of limitations expired.
Lesson to be learned:
When you have construction defects, you must be aware of compliance with the statute of limitations in order to sue; consult an experienced attorney promptly to guide you through this complex series of laws.
Scenario #9
A townhouse complex is built to circle a pool. The pool fence is iron and contains an iron gate. Mom, pregnant, is in her garage with a 20-month-old baby. Her phone rings and she goes into the house. The baby crawls under iron fence and falls into pool. A neighbor sees, from her second story window, the baby in the pool and runs down to pool. Mom discovers baby is gone and sees him floating in pool. Both neighbor and mom forget keys and cannot get in the pool area. The neighbor climbs the fence to rescue baby, but he again cannot get out of pool area because he does not have a key. The baby dies and a lawsuit is filed.
What went wrong?
Fence surrounding pool had enough space underneath for a baby to crawl under it. Locked gate that requires a key from the inside is dangerous.
Lesson to be learned:
Check fence around pool or other potentially dangerous areas for “safety.” Strictly adhere to safety codes. Never keep inside gates to pool area locked. Change to a latch or “escape bar.”
Scenario #10
A 100-unit townhouse complex has extensive common area and open space. The city has a leash law. Homeowners congregate with their dogs off leash on Sunday mornings. A small girl gets mauled by dog, leaving a permanent scar on face. A lawsuit is filed against the association. (Homeowner is a former board member).
What went wrong?
Association never enforced the city leash law.
Lesson to be learned:
Know your local laws and take steps to enforce them. This applies to leash laws, but also speed laws. Association should have put up signs in common area park that there is a leash law.
Conclusion
An association has the duty to enforce the CC&Rs. It also has a fiduciary duty towards its members. This means that it must act in the best interests of its members and the association.
The decisions it makes must meet the tests of either the “business judgment rule” or the “judicial deference rule.” The business judgment rule is that the board of directors must perform its duties in good faith, in a manner that it believes to be in the best interests of the association, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances [Corporation’s Code §7231(a)]. The judicial deference rule comes from the case of Lamden v. La Jolla Shores Clubdominium Homeowners Association (1999) 21 Cal.4th 249, which states that the courts will defer to a board’s decision when a board, on reasonable investigation, in good faith, and regard to the best interests of the association and its members, exercises discretion within the scope of its authority in making maintenance and repair decisions. If both of the tests are met, the board should be protected from liability.
Rules enforcement must be uniform and fair. Do not let emotions get in the way of reasoned decisions. Review your association for “risks” and take steps to alleviate them. Listen to homeowner concerns. Do not fall into the trap of tabling items on the agenda because you do not want to make a difficult decision. Someone has to make those decisions. Be informed. Avoid problems. Be creative in problem solving. Know your governing documents. Know your community. Be sensitive to what the homeowners want. Know your procedures. Follow them. Establish priorities.
Be informed.
Tom Fier is an attorney at law with a homeowner association practice in San Mateo, CA. He is the immediate past chair of the ECHO Legal Resource Panel.