Reader Questions – Are Our Reserves Being Handled Properly?

Reader Questions – Are Our Reserves Being Handled Properly?

Mr. Richardson, hello: Is there a formula for the reserve funds that are necessary, or at least advisable, for a HOA? Also, can an assessment be collected from each homeowner and put in reserve and then returned to them after a reasonable time if it’s not needed? Respectfully, B.K., San Diego Dear B.K.: HOAs in California are required by Civil Code Section 5550 to obtain a reserve study every three years and to review it annually. That reserve study informs the HOA as to how much money needs to be set aside each year to offset the ongoing deterioration of the common area elements included in the reserve study. There are many fine companies specializing in preparing reserve studies for HOAs. Without a good reserve study, the HOA has no roadmap for its financial security. As to assessing for money beyond that prescribed by the budget and reserve study, Civil Code Section 6600 requires that associations only assess for actual anticipated expenses. Assessing for a “rainy day fund” is not allowed. Best regards, Kelly Dear Kelly, Our board has not raised assessments for four years. The reserve budget is less than 7%. If the board raised assessments as recommended by the reserve study and the management company, it ought to be higher this year. Can I pursue the board for failing in their fiduciary capacity? E.Y., Pacoima Dear E.Y.: Budgets should follow the HOA’s projected actual expenses and the reserve fund contribution prescribed by the HOA’s reserve study. Budgets should reflect reality, not wishes. Some boards err by refusing to adopt realistic budgets which allow for the normal increases...
Wait for the Board to Act

Wait for the Board to Act

In community associations, corporate formalities seem to interfere with efficiency. Some argue that if someone is making good decisions, why wait for board meetings and motions which might delay the action? Although most clients view corporate procedures as a bother to be avoided as much as possible, the process is an important protection for volunteers. Corporations are a legal fiction recognized by law as a “person” with rights to own property, to sue, and be sued. The requirements of board action and written minutes are evidence that a legal responsibility is the corporation’s and not the volunteer’s. If these steps are skipped, how does the volunteer prove that the commitment was corporate and not personal action? Failing to follow corporate process could result in an obligation thought to be corporate being imposed upon the volunteer who failed to obtain corporate approval. Obviously, that would be a nightmare for the volunteer, but it can easily be avoided by waiting to sign a contract until the board approves it in a meeting. Corporations are legal fictions recognized by law as “persons” that act through authorized agents, normally a board of directors. Actions outside the corporate authority are called “Ultra Vires,” a Latin term meaning “outside the powers.” In business corporations, officers often act as the primary agents, but in HOAs, the primary decision-maker is the board. If an officer acts outside those powers and without board approval, it is not corporate action. Proper minutes are a critical part of the corporate process. If the minutes don’t record it, then the corporation didn’t do it. Minutes document corporate decisions, including any authority...
Nine Tips To Reduce HOA Conflict

Nine Tips To Reduce HOA Conflict

Handling conflict is a regular part of governing, managing, or advising HOAs, which are corporations but also neighborhoods. Unlike clubs or churches, when things get unpleasant, a member cannot simply resign, because it is one’s home. Disagreement is normal but is a problem when it becomes destructive. So, it is important to learn how to “disagree without being disagreeable” and how to respond when someone else is behaving disagreeably. DISAGREEMENT IS OK Some boards feel that all votes must be unanimous, confusing unanimity with teamwork. A nay vote is not disloyal nor is it any reflection upon the motion-maker. Allow board colleagues the freedom to disagree, because every director’s view is valuable, even when in the minority. Teamwork takes over after the vote is done. After the board votes, the corporation has decided, and the directors move forward. While the dissenting voters are free to express their opinions without retribution, they must support the corporation’s completed decision under their fiduciary duty of loyalty to the corporation. FIND THE SEED Some puzzles involve objects hidden in a larger background, where the task is to find the object camouflaged amid the distraction, and the challenge in reducing conflict is identical. A member may be seething and spewing rude remarks, but there may be a legitimate concern hiding in all that upset. An unpleasant way of expression does not negate the factual complaint expressed – perhaps anyone might be upset by their situation. Find the seed within the upset and respond to that instead. Responding emotionally in like kind simply escalates conflict. FORGET HISTORY When dealing with a disagreeable fellow director or...
Reader Questions – Pandemic Questions Continue

Reader Questions – Pandemic Questions Continue

Kelly, I am on the board and we are having our first HOA virtual meeting next week because of Covid-19. Do we need to have a quorum for that meeting? I appreciate your help and enjoy your HOA Homefront each week. R.S., Garden Grove Dear R.S.: The declared state of emergency in California does not mean the Open Meeting Act or your bylaws have been suspended. Many HOA boards are mistakenly thinking that everything now is an emergency, and thereby dispense with the required transparency under the law. Quorum, notice to members, and openness are still the requirements, even during this emergency. Civil Code Section 4923 defines “emergency” as “circumstances that could not have been reasonably foreseen” requiring immediate action. There are few topics which cannot wait four days for proper notice to members. Also, meetings can still be in the open. Telephonic or electronic meetings are permitted by Civil Code 4090(b) and 4925(a) – so there is no reason to hold improper closed or emergency meetings. Even in times such as these, proper association governance is not suspended – there is no “HOA martial law” in effect. Best regards, Kelly Dear Mr. Richardson: Our residents are concerned about cases of Covid-19 in our HOA. Our manager told us that legal counsel said because of HIPAA rules they are not obligated to report if there are or have been any active Covid-19 cases. We are not asking for names, just a knowledge of whether there are or have been Covid-19 cases. What is our HOA responsibility in this matter? E.K., Oceanside Dear. E.K.: I have had many association clients...
Reader Questions – Are HOA Board Term Limits Allowed?

Reader Questions – Are HOA Board Term Limits Allowed?

Mr. Richardson: I appreciate your column in the [paper]. Many of your topics are extremely helpful. According to our election rules and bylaws, no director shall serve more than two consecutive terms. The president now claims that SB323 has done away with term limits and she can run again and continue to serve on the Board for a third consecutive term. She also claims our attorney said there are no longer term limits, however, no board member has been allowed to see that correspondence. Please, would you help to clarify this? I’m hoping you can provide some direction. L.K., Westchester Dear Kelly: First I’d like to thank you for all the great articles I read in the [paper]. Our HOA does not have term limits for board members. There are plenty of us that would like to have term limits and I’m shocked that when the HOA was created that this was excluded. Thanks, A.T., Beaumont Dear L.K. and A.T.: Many HOAs find term limits useful to ensure a healthy turnover of the board and have bylaws which limit consecutive terms of service. On the other hand, HOAs having difficulty in filling their board seats may find term limits to be undesirable. The key is for each association to adopt a system which works for its community. However, a change in the law this year may take that option away from California common interest developments. The new law now in force from last year’s SB323 appears to have eliminated term limits from HOAs in California. Civil Code Section 5105(b) lists one mandatory disqualification for board candidacy – non-membership –...
Harassment and Handicapped Parking Questions

Harassment and Handicapped Parking Questions

Hi Kelly, Perhaps you have an answer to the following case. A homeowner in our HOA (he might have a form of mental illness) is said to have harassed a new homeowner couple based on his objection to their interracial marriage.Some homeowners are asking the board to take action against the harassment, they claim cases like this have been ruled to be a HOA responsibility. I am looking at it as a dispute between two homeowners, a case for the police to settle or by dispute resolution. K.N., Santa Barbara Dear K.N.: HOAs must do what they can to respond to harassment of residents because of their membership in a protected class. This has been part of the regulations issued by the U.S. Department of Housing and Urban Development since the Fall of 2016. As of January 2020, it is also a requirement under California’s Fair Housing Regulations. Associations, their boards, and their managers may not stand idly by as residents are harassed because of their having one of the many of the characteristics protected by law. The law requires associations to investigate the allegation, try to determine what happened, and to do what they have the power to do to try to stop the harassment. The failure to properly respond to discriminatory harassment could subject the HOA, its board and its manager to enforcement action as well as a civil lawsuit and request for damages by the aggrieved resident. All residents in homeowner associations deserve to live their lives free of the fear that someone may abuse them solely because of their skin, language, gender, or other characteristic...
Reader Questions – Board Contacts, Discussions, and Elections

Reader Questions – Board Contacts, Discussions, and Elections

Kelly: Is the HOA required to supply the state a current list of the board members? Is the list available for public view? I am not a member of the HOA. G.O., Agoura Hills Dear G.O.: If you are not a member of the HOA, the only public information available is on the Secretary of State’s website – www.businesssearch.sos.ca.gov. This site will give you the correct legal name of the corporation (if the HOA is a corporation) and is updated at least every 2 years. It will also provide you the names and contact information for the CEO/President, Secretary and CFO/Treasurer (but often the management company lists its own address for each of the officers). Thanks for your question, Kelly. Mr. Richardson, I read your column each week in the [paper] and have learned many great tips. I have a question about board members talking to each other about issues outside of the meeting sessions. I prefer to make sure the association is always protected and indemnified with all contracts and work orders. In order to do so, I want to develop an agreement that would protect the association but would like to get input from my other board members. Does the Davis-Stirling act preclude any conversation, or interaction prior to a meeting to develop documents and reviews that would be brought to the open session board meeting for discussion and or approvals? Thanks, D.G., Orange. Dear D.G.: If a quorum of the board is discussing an HOA topic at the same time or in email, it violates the Open Meeting Act. Civil Code 4090 says if a quorum...
Why Not Hire Our Neighbor?

Why Not Hire Our Neighbor?

A very common temptation in the HOA is to hire one of the members or a tenant to work for the association. The arguments often are that the resident or member is known to all, offering a discount, and knows the property well. Some HOAs even hire a resident to manage the association. Only the very smallest associations can operate without a professional manager, and they tend to operate more as partnerships than HOAs. Experienced managers are expected to be current on the governance and financial procedures required by law and the frequent changes in those procedures. A professional manager has knowledge of many vendors and good contracting practices, and usually has others in their company to whom they can turn for advice or information regarding challenges. Credentialled managers have continuing education requirements requiring them to keep current. When the HOA hires one of its own to do paid work for the association, a number of complications arise. Normally the primary argument for hiring the neighbor is that they will do it cheaper than the HOA’s current vendor. Sometimes the reason they can do it at lower cost is that they are not trained, do not have the necessary insurance or credentials, and frankly are happy to have the extra income. Is the board ready to question the neighbor about their qualifications, or will the board hesitate to be “rude”? Another problem with hiring a neighbor arises when things go poorly.  Who wants to tell the neighbor that their work is bad, or that they need to be terminated? What if the work is so bad that the person...
Can HOAs Exercise Leniency During Hard Times?

Can HOAs Exercise Leniency During Hard Times?

Amidst a state-wide shutdown of all non-essential businesses, many homeowners are already feeling the pinch of reduced employment or business income, and calls are already arising in many HOAs for the association to be lenient regarding delinquencies. While emotionally the immediate response is to not push assessment collection, the matter is not so simple for the association board of directors. Associations of course depend upon assessments from each member to pay the community’s common expenses. Those expenses benefit each homeowner and generally must be paid in bad times as well as in good times. If, for example, 10% of the members fail to pay their fair share of the expenses, the other 90% may wind up paying that extra shortfall – an 11% increase for them. The management fees, landscaping expense, utilities and insurance are examples of expenses which are relatively constant. The HOA cannot stop paying its utilities or insurance, just as the individual non-HOA homeowners still must pay their bills. Many other association obligations arise from binding contracts, so the board cannot just decide to stop paying. So, association boards are obligated to insist that all members pay their fair share of the HOA expenses and to diligently pursue such delinquencies. Should members who are having financial difficulties stop paying and request leniency? That may be a very bad idea, because it essentially asks the board to give some homeowners extra consideration and thereby violate its duty of acting in the best interests of the HOA as a whole. Furthermore, the HOA is duty bound to pursue the delinquency, which could add collection costs, late charges and...
How HOAs Can Cope With Pandemic

How HOAs Can Cope With Pandemic

In the past few weeks, as the COVID-19 aka “coronavirus” proliferated globally, local, state, and some national governments have taken strong measures to ban groups from congregating and ordering non-essential businesses to close. Here are some suggestions which may help associations through these unprecedented and difficult times. BOARD MEETINGS. Boards are not banned from holding meetings, because most boards are less then 10 members. However, because board meetings are open to attendance by members, how does the board restrict the group of attendees from becoming too large? Furthermore, if a board honors the “stay at home” directive, does that mean the board must halt meetings? Fortunately, Civil Code Sections 4090 and 4925 specifically allow for video or telephonic board meetings. The requirement is that all directors and any attendees be able to hear the director deliberations. Careful consideration should be given to the various web-based platforms supporting on-line audio or video meetings, because they allow the organizer of the meeting to selectively mute attendees. This allows open forum to proceed, with members able to speak to the board, and then after open forum the attendees can be muted so they can hear but not participate in the board’s deliberations. MEMBERSHIP MEETINGS. Although the Davis-Stirling Act does not provide for HOAs to conduct electronic membership meetings, membership meetings may be conducted electronically under Corporations Code 7510. However, HOAs are the only California corporations not permitted to use Corporations Code 20 and vote electronically (Civil Code 5115 still requires the double envelope secret paper ballot process) so the agenda could be pursued via conferencing services, but paper ballots would have to...