QUESTION: Our CC&Rs are silent on the issue of attorneys’ fees. To discourage lawsuits, should we amend our CC&Rs to allow the award of attorneys’ fees if a matter goes to litigation?

ANSWER: Attorneys’ fees clauses are double-edged swords. While the provision allows an association to recover legal fees, it often becomes the driving force behind litigation. For example, each side might spend $50-100,000 litigating a matter that has a disputed value of $12,000. When that happens, settlement becomes almost impossible. The plaintiff wants $12,000 in damages PLUS another $100,000 to cover his legal expenses. The defendant might agree to pay $7,000 to make the litigation go away but will never pay plaintiff’s legal fees (nor will the insurance carrier). That means each side will spend another $50-75,000 taking the matter to trial just to get a shot at recovering their legal fees.

Eliminating Fee Awards. If each side had to bear its own legal fees each time a matter was litigated, they would be forced to weigh the costs before jumping in. This would slow down the filing of lawsuits. Once in litigation, legal fees would also speed settlement since neither side wants to spend a non-recoverable $100,000 over a $12,000 dispute. Unfortunately, putting the brakes on litigation would require amending the Davis-Stirling Act. Currently Civil Code 1354(c) provides:

In an action to enforce the governing documents, the prevailing party shall be awarded reasonable attorney’s fees and costs.

It is unlikely the legislature will ever eliminate this provision, which means legal fees will continue to encourage litigation because plaintiffs always think they have a winning case and will recover legal fees. And, legal fees will continue to impede settlements when expenses spin out of control. It also means that owners who live in litigious associations will inevitably face higher dues for insurance premiums and potential special assessments for legal fees.

Sincerely yours,

Adrian Adams, Esq.
Adams Kessler PLC

QUESTION: Can owners be made to purchase H06 policies? Can docs be amended to include this requirement?

ANSWER: Yes, CC&Rs can be amended to require owners to carry insurance. The requirement can extend to tenants as well.

Renter’s Policy. Renters can be required to carry an HO4 policy which protects a tenant’s personal property against loss and limits exposure to personal liability claims. Protecting the tenant against loss protects the association.

Owner’s Policy. Owners should be required to carry an HO6 policy (”Homeowners 6″ or “Condominium Unit Owner Policy”). Without it, they are exposed to loss and are more likely to sue the association. Moreover, the secondary mortgage market is now requiring protection for owners. Owners’ insurance should cover the following:

1.  Personal Property Coverage that insures unit contents such as clothing and furniture.

2.  Personal Liability Protection which pays for bodily injury and property damage.

3.  Loss of Use Protection that pays for extra expenses (hotel, restaurants, etc.) while the owner’s home is uninhabitable because of damage.

4.  Loss Assessment Coverage that covers the owner’s portion of special assessments levied by the association resulting from insured losses.

5.  Real Property Coverage that insures those portions of the premises not insured by the association’s master policy.

RECOMMENDATION: Associations should amend their CC&Rs to require both owners and tenants to carry insurance. To avoid potential liability, the amendment should also relieve the association of enforcement requirements related to the amendment. In addition, boards should regularly publish reminders that owners and tenants need to carry their own insurance.

Sincerely yours,

Adrian Adams, Esq.
Adams Kessler PLC

QUESTION: Our board opted to amend our CC&Rs to require the association to carry “studs out” insurance. Is it necessary to hire an attorney or can we just write what we intend and take it to the county and record it?

ANSWER: The board can prepare the language on its own but it runs the risk that the language may create unintended consequences that an experienced attorney would spot. Moreover, the board cannot draft the language and then record it; the amendment must first be approved by the membership using secret balloting. Finally, the amendment must be in proper format for recording purposes and properly certified, otherwise it will be rejected by the Recorder’s Office. Avoiding legal fees is a good idea when it makes sense. I’m not sure this is one of those times.

Sincerely yours,

Adrian Adams, Esq.
Adams Kessler PLC

QUESTION: An owner installed hardwood floors in his 3rd-floor unit in direct violation of the rules. He was notified before, during and after installation. The owner thumbed his nose at the HOA. He was fined and the HOA hired an attorney to enforce the rules. Only after the HOA filed suit did he remove the flooring.

ANSWER: Some owners love to play chicken. They violate the rules and dare the association to do something about it. We had a similar situation where the board gave an owner warnings before, during and after the floor installation. We took the violation to binding arbitration and the owner was ordered to remove the floors and pay the association’s legal fees. To everyone’s relief, he sold his unit and moved.

Second Story Ordered Removed.

An even more dramatic example came down two weeks ago from the Court of Appeal. It involved an owner who thumbed his nose at an association’s height restrictions when he added a second story to his house. See Gary Kessler’s “Condo Court” for details.

Sincerely yours,

Adrian Adams, Esq.
Adams Kessler PLC

If you live in a homeowners association in California, you also live in a civil jurisdiction where the city or county has animal control regulations. They have the power to issue warnings, levy fines and take court action depending upon the severity of the infraction. That said, often times a dual approach can be taken whereby someone could contact both animal control AND the association. As the association may need to take a slower approach, the association can even use the animal control findings as part of its decision making process.

Sincerely yours,

Adrian Adams, Esq.
Adams Kessler PLC

QUESTION: One of our members would like to use cumulative voting in our current board election. Our bylaws state that they must announce at the meeting that they will use cumulative voting. We vote by mail with the 2 envelope system so there is no meeting to announce before voting. Can he still use cumulative method and, if so, does he need to announce by another means or perhaps declare it on his ballot?

ANSWER: Since your governing documents allow cumulative voting, you must automatically “announce it” in the ballots you mail to your members. Declaring it at a meeting is no longer required. Civil Code 1363.03(b).

Sincerely yours,

Adrian Adams, Esq.
Adams Kessler PLC

QUESTION: We are a large 55+ community. Elections for the board are coming up shortly. Two candidates were directors in the past but not currently. Their campaign literature is asking residents to “Re-Elect” them. There is potential for confusion, particularly among the very elderly. Is there any constraint, ethically, legally or otherwise against their asking to be “re-elected”?

ANSWER: It is unethical to intentionally wage misleading campaigns. They confuse more than just the very elderly. Those who wish to set the record straight have the right to point out the candidates’ misstatements to the membership.

Sincerely yours,

Adrian Adams, Esq.
Adams Kessler PLC

QUESTION: Regarding your latest newsletter about an association taking over the mortgage via the foreclosure/sale process, your article mentioned that the bank will ultimately foreclose on the association if the mortgage is not paid by the association. What effect would this have on the association’s credit? We have a unit under water and the bank has been postponing the sale date for over a year now.

ANSWER: If the association takes ownership and the bank subsequently forecloses, it will not impact the association’s credit. The loan is in the prior owner’s name and the bank is foreclosing on the unit, not the association. The prior owner’s credit is harmed, not the association’s. Even if the association’s credit were somehow affected, it would be meaningless. Associations normally do not borrow money for consumer goods or to buy property. Typically, the only time they borrow is to make repairs. When that is done, the loan is secured by a special assessment approved by the membership.

Renting the Unit. You mentioned the bank’s continual postponing of the sale date. Too many banks are delaying foreclosures because they don’t want the property on their books nor do they want to pay the association’s monthly dues. As a result, they sit on their hands and do nothing. As I mentioned last week, associations can foreclose on the unit, take possession, and put a renter in the unit until the bank completes its own foreclosure. Because the bank will eventually foreclose, you cannot put the renter on a long-term lease. It should be month-to-month since the bank will want the renter to vacate at some point so it can get the unit ready for sale. To find a renter willing to lease for an uncertain time-period, you need to offer the unit at below-market rents.

Rent Skimming. Boards should be aware that the bank may demand the rents collected by the association per Civil Code 890. If a bank were to make a demand, the board must immediately turn over the rents. I’ve never seen it happen but it’s a possibility and boards should consult with legal counsel before proceeding.

Sincerely yours,

Adrian Adams, Esq.
Adams Kessler PLC

QUESTION: We have a qualified board who seeks guidance from attorneys and experts when needed. Like most CIDs we have a small faction of owners who claim that almost every act by the board is illegal. They forced us into ADR, which cost us $28,000 in legal fees. There was no resolution and the dissidents walked away. Can we go after the dissidents for the legal costs or do we need to special assess our membership?

ANSWER: Unfortunately, you need to special assess your membership. Dissent is a healthy part of the political process but owners who view all boards as power-hungry law breakers are dead wrong. Moreover, they are harmful to their associations because of their constant disruptive behavior and litigation. It is even worse when they get themselves elected to the board. Once in control, they often impose the very destructive practices they alleged when they were off the board.

Recouping Fees. For better or worse, legal fees are part of an association’s “cost of doing business” and there is no way to recoup them unless a dispute goes to trial (or binding arbitration), the association wins, and fees are awarded to the association. Even then, awards are at the discretion of the judge or arbitrator.

Sincerely yours,

Adrian Adams, Esq.
Adams Kessler PLC

Litigious Owners. I believe the best way to reduce litigation is for the HOA to act in compliance with the law and their CC&Rs. Far too often, ignorant power-hungry control-freak directors facilitated by unqualified or unethical property managers break the law or do not act in a fiduciary manner. They fail to live up to their duties and responsibilities. Director’s failures, malfeasance or bad acts leave homeowners with few choices other than to seek relief in court. -Phil A.

RESPONSE: Sometimes litigation is the only way to force a bad board to behave properly. However, it is much better (and much less expensive) to resolve such matters through the election process whenever possible.

Sincerely yours,

Adrian Adams, Esq.
Adams Kessler PLC