Community Association Update: Issue # 32

  - Annual Legislative & Case Law Update (2017)

Happy New Year!
Below you will find an overview of the 2016 legislation and case law impacting California HOAs as we head into 2017. The material below is not meant to be an exhaustive list of all new legislation and case law; we have summarized what we believe is the most important to the majority of our HOA clients and the industry professionals who service them. If you have any questions regarding the items below, please feel free to contact our offices anytime!

Steven Tinnelly, Esq.
Tinnelly Law Group

(Effective January 1, 2017)
Unless otherwise provided for in a HOA's CC&Rs, Civil Code § 4775 establishes the default apportionment of common area maintenance and repair responsibilities of a HOA versus those of the individual owners. Section 4775 was somewhat ambiguous with regard to exclusive use common area; Section 4775 failed to state whether an owner is responsible for the "repair and replacement" of exclusive use common area, not simply "maintenance." Industry practice has held that the responsibility to repair or replace exclusive use common area is the HOA's. AB 968 served to codify industry practice by amending Section 4775 to state that, unless otherwise provided for in the CC&Rs, the owner is required to maintain exclusive use common area, and the association is responsible to repair and replace exclusive use common area.

(Effective July 1, 2018)
AB 1978 creates the Property Services Workers Protection Act. Adding Part 4.2 (commencing with Section 1420) to Division 2 of the Labor Code, it requires every janitorial business within California to register yearly with the Commissioner of the Division of Labor Standards Enforcement ("DLSE") and pay a yearly fee of $500.00. Businesses (including HOAs) which contract with unregistered and unlicensed janitorial businesses are subject to fines of $2,000.00 to $25,000.00.
How will you know if the janitorial business is registered?  The DLSE is required to maintain an online Janitorial Contractor Registry which is to be a public database of property service employers on the website of the Department of Industrial Relations including the name, address, registration number, and effective dates of registration of all janitorial businesses.

(Effective January 1, 2017)
AB 2362 added new Civil Code § 4777 to require a HOA to notify the residents of a separate interest, along with the residents of any impacted adjacent separate interests, when pesticides are to be applied to the separate interest or common area by an unlicensed pest control operator. The notice must contain the pest(s) to be controlled, the name and brand of the pesticide product to be used, the approximate date, time, and frequency with which the pesticide will be applied, in addition to specified verbiage included in the Code. 

(Effective January 1, 2017)
SB 3 amends Labor Code § 1182.12 to increase the minimum wage for all industries to $15.00 per hour by 2023, except when the increases are suspended by the Governor. The Code requires the Director of Finance to adjust the minimum wage under a specified formula by August 1st of each year, with the new minimum wage taking effect the following January 1st, provided the General Fund can support the scheduled increase. The changes to the law are expected to impact the prices of goods and services that are provided by HOA vendors, which in turn will result in an increase in the HOA's annual operating expenses. 

(Effective January 1, 2017)
SB 814 added Section 1 to Chapter 3.3 of Division 1 of the Water Code to prohibit excessive water use by a residential customer during a drought. It requires "urban water suppliers" to establish methods to identify and restrict excessive water use (i.e., the establishment of a rate structure using block tiers, water budgets, penalties for prohibited uses, or rate surcharges). The bill also authorizes the establishment of excessive use water ordinances and makes violations of such ordinances punishable by a fine of at least $500 per 100 cubic feet of water above established thresholds. SB 814's changes to the law are applicable only during periods of government-declared droughts.

(Effective January 1, 2017)
SB 918 added new Civil Code § 4041 to require the owners of a separate interest to annually provide the HOA with written notice of all of the following: 1) the mailing address to which notices from the HOA are to be delivered, 2) a secondary address to which notices from the HOA are to be delivered, 3) the name and address of their legal representative, if any, including any person with power of attorney or other person who can be contacted in the event of the owner's extended absence, and 4) whether the property is owner-occupied, rented, vacant, or undeveloped land. The association shall solicit the annual disclosure and update the association's records at least 30 days prior to making the association's annual disclosure in accordance with Civil Code § 5300 (pertaining to the annual budget report) . If an owner fails to make these disclosures, the property address shall be deemed the mailing address.

H.R. 3700 required the Department of Housing and Urban Development ("HUD") to streamline the Federal Housing Administration ("FHA") recertification process, provide regulations for commercial space exemptions, allow for deed-based transfer fees, and lower the owner-occupancy requirement within ninety (90) days of the bill's approval. HUD then proposed a new rule governing the certification requirements for condominium associations. The proposed rule includes: extending the recertification period from every two years to every three years; reinstating spot approvals; establishing an allowable range for commercial space between 25 and 60 percent, allowing mixed-used communities an opportunity to obtain FHA approval; requiring the budget include a 10% line item for reserves; and establishing an allowable range for owner occupancy between 25 and 75 percent.
On October 25, 2016, FHA formally lowered the owner-occupancy rate to 35% under certain conditions. In order to qualify for the lower rate, the association must meet the following requirements: it must be more than 12 months old; the budget must include at least a 20% line item for reserves; the delinquency rate must be less than 10% (more than 60 days past due); and the association must provide three years of stable financial statements.
Condominium associations that do not meet these requirements will be subject to the existing owner-occupancy requirements.

The California Air Resources Board ("ARB") passed a regulation that requires diesel trucks and buses that operate in California to be upgraded to reduce emissions. The Regulation has a direct impact on HOAs and requires them to take steps to verify that certain vehicles they hire are properly certified with the State. The Regulation requires lighter and older heavier trucks to be replaced starting January 1, 2015. By January 1, 2023, nearly all trucks and buses will need to have 2010 model year engines or equivalent.
The Regulation requires that any party (including HOAs, board members, and managing agents) that hires or directs the operation of any vehicle subject to the Regulation, must verify that each hired company is either in compliance with the regulation or has reported compliance to the ARB. The Regulation does not apply where the party does not hire or direct the operation of any vehicle subject to the Regulation. The types of vehicles that an HOA or its managing agent may encounter include but are not limited to the following: street sweepers, dump trucks, pumper trucks, crane trucks, charter buses, lift trucks, concrete pump trucks, and tow trucks.

Almanor Lakeside Villas Owners Assn. v. Carson (April 2016)
The defendant homeowners leased their property for short-term vacation rentals despite the fact that doing so violated the CC&Rs. The defendants also disputed the HOA's ability to adopt and enforce rules against them relating to parking, trash storage and common area use. The HOA fined the homeowners tens of thousands of dollars for their repeated violations and ultimately sued them.
The trial court ruled that the HOA had the authority to adopt and enforce many of the rules at issue and awarded the HOA nearly $100,000 in attorney's fees, as well as approximately $6,000 in fines. The amount of fines that were awarded were roughly 10% of what the HOA initially sued for, but the trial court still deemed the HOA the "prevailing party" entitled to recover its attorney's fees under the Davis-Stirling Act.
The homeowners appealed, believing that the HOA could not be deemed the prevailing party in light of it not being awarded roughly 90% of the fines it originally sued for. The homeowners lost on appeal, as the court concluded that the key issue in the lawsuit was the HOA's right to enforce rules and to impose fines for violations, not the amount of the fines themselves.

Nellie Gail Ranch Owners Assn. v. McMullin (October 2016)
A homeowner willfully and without approval built a retaining wall and other improvements upon approximately 6,000 sq.ft. of an adjacent common area parcel. The rural nature of the HOA resulted in the trespass not being fully discovered for several years. When the trespass was discovered, and the HOA's enforcement demands were not complied with, the HOA sued.
The homeowner argued that he had acquired ownership of the disputed common area through "adverse possession"-a doctrine of California law that allows a trespasser to attain ownership over another person's land provided that several factors are met. One of those factors is that the trespasser must pay the property taxes levied on the encroached area for five (5) years, unless the area has no value and no property taxes are assessed against it.
The homeowner asserted that the common area lot had no value and thus no taxes were assessed, nor needed to be paid. In striking down the homeowner's argument, the court explained that common area lots do have value and, though they may not be separately assessed for property tax purposes, their taxable value is reflected in the market value of each of the HOA's members' separate properties. Property taxes for common area lots are therefore billed to and paid by every homeowner within the HOA individually. As a result, this element of adverse possession could not be established, and the trial court's ruling in favor of the HOA was affirmed.

Palm Springs Villas II HOA v. Parth (June 2016)
Parth took a number of problematic actions on behalf of her HOA while serving as a Director. Examples include signing promissory notes on behalf of the HOA that were in violation of the Bylaws, terminating the management company without Board authorization, and executing a vendor's contract in violation of a prior Board resolution which required her to obtain multiple bids from competing companies. Parth was ultimately sued by the HOA for breach of her fiduciary duties.
Parth claimed that she was protected by the Business Judgment Rule ("BJR") and the trial court agreed. The Court of Appeal overturned the trial court's decision, holding that the BJR requires a showing that the Director acted with reasonable diligence. The Court further explained that a Director "cannot close his eyes as to what is going on about him in the conduct of the business of the [HOA] and have it said that he is exercising business judgment." Parth failed to act with reasonable diligence (i.e., failed to ascertain the extent of her authority under the Bylaws, failed to investigate the companies she contracted with, etc.). The trial court should not have automatically extended the BJR's protections to such "willful ignorance."

Rancho Mirage Country Club HOA v. Hazelbaker (2016)
The Defendant homeowners obtained HOA approval to make improvements to their patio in compliance. The HOA subsequently determined that the improvements exceeded the scope of the approval and then requested Alternative Dispute Resolution ("ADR") with the Defendants. At ADR, the parties reached a settlement agreement. The agreement did not provide for the prevailing party in a subsequent legal action to enforce the agreement to recover its attorney's fees.
The Defendants did not honor the terms of the settlement agreement. The HOA then filed suit seeking specific performance of the agreement, as well as recovery of its attorney's fees and costs incurred in taking legal action. The trial court found the HOA to be the prevailing party and awarded it its attorney's fees and costs, pursuant to Civil Code Section 5975(c).
The Defendants appealed the ruling, contending that, among other things, the enforcement of the settlement agreement did not constitute "an action to enforce the governing documents," and the HOA was therefore not entitled to recover its attorney's fees. The Court of Appeal rejected this argument, holding that an action to enforce the settlement agreement was-at its core-an action to enforce the governing documents.

Welcome New TLG Clients!

2016 was quite a year for our growth, as we were privileged to welcome over 70 new communities to TLG's client family! Some of the more recent clients to sign on board include:

Alterra is Collecting Assessment Debt. Lots of it.

Tinnelly Law Group is proud to provide its clients and HOAs throughout the state with access to comprehensive collection services through the use of our affiliate, Alterra Assessment Recovery. Alterra was founded with the goal of providing efficient and effective collection services, utilizing the best technology available and a skilled, dedicated team of professionals. In just its first 3.5 years of operation, Alterra has already recovered over 2.5 million dollars in assessment debt for its clients, with no signs of slowing down. Alterra appreciates all the support it has received and remains committed to providing consistent results with the best service possible.
Your Community. Your Counsel. TM