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Posts Tagged ‘HOA’

Association Board Members Have Fiduciary Duties

Posted on: February 6th, 2020

By: Ali Sabzevari

The Georgia Property Owners’ Association Act and an HOA’s governing documents govern the creation and operation of a homeowners’ associations (“HOA”) and the duties of its board members.

A Board of Directors is typically responsible for managing all aspects of an HOA, but what some people may not understand is that board members have what are called “fiduciary duties” owed to the HOA members in the neighborhood.  A fiduciary relationship may be created by law, contract, or the facts of a particular case. The board members are in an important position of trust, and therefore owe a fiduciary duty to the HOA.

Board members owe fiduciary duties to the homeowners who form the HOA, including a duty of good faith and duty of care, among others. A board member’s failure to adhere to its fiduciary duties could expose the HOA to legal suits and potential liability. Under Georgia law, “a claim for breach of fiduciary duty requires (1) the existence of a fiduciary relationship, (2) breach of that duty, and (3) damage proximately caused by the breach.”

Before volunteering to serve on a Board of Directors, one should consider the legal duties involved.  Moreover, newly-formed and existing Boards need to fully understand and appreciate the governing documents and the duties imposed therein and under Georgia law, including fiduciary duties.  These duties should be taken into consideration when making decisions that impact the HOA members.  Dealing with these issues can be complex.

If you have any questions or would like more information, please contact A. Ali Sabzevari at [email protected].

Changes In Store for California HOA Elections

Posted on: November 18th, 2019

By: Nicole Clowdsley

With 2020 fast approaching, California HOAs should be proactively preparing to comply with a litany of new statutorily mandated changes to their election processes. On October 12, 2019, California Governor Gavin Newsom signed Senate Bill 323 into law resulting in amendments to multiple sections of the California Civil Code regulations governing HOA elections. These changes become effective January 1, 2020.

Among the more significant substantive changes are specific standards HOAs may use to disqualify candidates from running, such as ineligibility of persons with certain past criminal convictions. Also, in order for an HOA to allow for board member acclamation – meaning there are more open positions than nominees and the nominees simply take the board seats – an HOA needs to have at least 6,000 units! HOAs may no longer suspend any member’s voting rights for any reason other than not being a member. Finally, in addition to limiting who may serve as an inspector of elections, HOAs must now ensure the inspector retains additional election materials, such as candidate registration and voter lists, for one year following the election process.

In addition to all the new requirements HOAs must abide by, associations needing to amend their election operating rules must now do so no later than 90 days before an election. So, for those HOAs with elections after the first of the year, time is of the essence. HOAs must act quickly to ensure upcoming elections are conducted in accordance with California’s extensive new requirements, or, they could find their election results overturned for legal noncompliance.

If you have any questions or would like more information, please contact Nicole Clowdsley at [email protected].

HOAs and COAs increasingly confront owner challenges to regulation of short-term rental

Posted on: May 28th, 2019

By: Justin Boron

By now, it’s clear that short-term rentals are neither a passing fad nor the high-minded pretense that underpinned their growth—laid-back homeowners who connect through an online platform with other like-minded individuals just looking for a place to crash for a few nights.

Instead, the short-term rental market is a full-fledged, real-estate business disrupter that is highly profitable and attractive to condo owners in areas with vacation appeal.  For condominium and homeowner associations, the word ‘disrupter’ is all too true.

Take your pick of the “disruptions” that short-term rentals can cause HOAs and COAs.  Safety, noise and pollution, insurance issues, inability to obtain mortgage financing, short-term rental taxes, violation of condo rules and destruction of property by the transient renter.

In response, HOAs and COAs have tried to push back on short-term rentals by attempting to enforce existing restrictions in their governing documents or by adopting new restrictions on short-term leases.  But unit owners eager to take advantage of the income-potential in the short-term rental market aren’t going away quietly and have gotten ever-more creative in avoiding HOA and COA restrictions.

The battle-lines have been drawn, and many of the disputes are making their way to court.  Below are some of the more interesting cases involving short-term rentals and potential solutions to the problems they present.

Can A Condo Association Ban Short-Term Rentals?

Putting aside the question of whether it should, whether a COA or HOA can ban short-term rentals outright, of course, depends on the authority granted to the association and the board in the governing documents.

Many associations have some sort of restriction on leasing of units within the association, whether it is durational (e.g., no less than six-month rental terms), a ban on commercial use of a unit, or an owner-occupied requirement.  But on the other side, there are individual property rights that courts must balance.  HOAs and COAs have met court challenges when attempting to ban short-term rentals using these types of restrictions, which in almost every case, were not drafted with the short-term rental market in mind.

For example, several condo owners successfully argued that a condo association’s ban on short-term rentals was beyond its power because its founding documents did not grant the association the right to restrict leases by duration.  See Wilkinson v. Chiwawa Cmtys. Ass’n, 327 P.3d 614, 621 (Wash. 2014).

Condo owners waged a similar challenge based on an association’s attempt to rely on its covenants against commercial use to ban short-term rentals.  See Houston v. Wilson Mesa Ranch Homeowners Ass’n, 360 P.3d 255, 261 (Colo. App. Ct. 2015).  The court agreed that short-term rentals used for sleeping and eating did not fit within the definition of a business use.

In instances where a HOA or COA lacks authority to ban short-term rentals in its governing documents, its next best option is likely to amend its governing documents according to the procedures supplied in them—typically a supermajority vote of the unit owners—to specifically ban short-term rentals.

Flouting An Owner Occupied-Requirement

HOAs and COAs might take comfort in condo documents that affirmatively require any units to be “owner-occupied.”  But an enterprising owner developed an interesting work-around for the owner-occupied requirement.  He placed his unit in an LLC, and then he sold small percentage shares of the LLC to would-be short-term renters that the LLC documents required the purchaser to sell back to the LLC at the end of their stay.  It allowed the short-term renter to say: “I’m not a tenant.  I’m a co-owner.”[1]

The COA could argue that the owner’s arrangement is essentially a time-share, which many COA and HOA documents prohibit.  But in omitting a particular block of time that a member of the LLC owns, it lacks one of the essential qualities of a timeshare.  A COA would likely be more successful in arguing that the substance of the arrangement should be considered over the form.  None of the “owners” of the LLC could say with a straight face that they believed they were investing in a real estate venture.

The Absent Owner Renting Short-Term Under The Radar

The most ubiquitous problem related to short-term rentals likely arises when an HOA or COA has effectively banned short-term rentals.  Despite a clear prohibition, there is often an absent owner who flouts COA rules and rents short-term.  To the extent his or her violations are detected, boards can likely be effective in enforcing rules with notice and fines.  If the measures are ignored, most states’ legislation for HOAs and COAs permit the association to obtain an injunction to end a unit owners’ violation.

If you have any questions or would like more information, please contact Justin Boron at [email protected].

[1] Marshal Granor, Emerging Trends and Hot Topics in Condominiums and Homeowners Association, Ch. 2 Short-Term Rentals (2019).

Best Practices for HOA Elections

Posted on: February 13th, 2019

By: Charles McCurdy

In California, as communities with HOAs have proliferated, so has the thicket of statutes, rules and regulations that apply to their operations. For example, just holding an election for an HOA’s Board of Directors implicates California’s Civil Code, its Corporations Code and an HOA’s governing documents, including its bylaws and CC&Rs. Additionally, since 2006, HOAs must have separate documents setting forth their voting rules. As HOA elections frequently morph into contentious affairs, it is often a good idea to provide as much clarity as possible on the standards and procedures to be used in advance of the election. This can help elections run more smoothly and may enable HOAs to avoid disputes and even costly litigation about the results.

To further this goal of more agreeable elections with more definite outcomes, HOAs should update their governing documents, particularly bylaws and voting rules. The Civil Code (§ § 5105 – 5130) relating to HOA elections has changed twice in the somewhat recent past (2006 and 2013), while many HOA’s governing documents date from their founding. In many instances, amended statutes may supersede outdated governing documents. This can sow confusion when members rely on governing documents that no longer control to understand how the election will be run, who are eligible candidates, and other important election-related considerations. Once governing documents comport with current statutes, HOAs should distribute them to their members in the lead up to elections. For example, HOAs can include these documents as part of an election package that may also include ballots, candidate information and other instructions or regulations. HOAs should also remember the law mandates equal access to association media (such as newsletters) and meeting space for campaigning.

While HOA elections may not always bring out the best in their members, a bit of anticipatory drafting and information sharing can go a long way to avoiding litigation over their results.

If you have any questions or would like more information, please contact Charles McCurdy at (415) 352-6416 or [email protected].

California Enacts New Anti-Fraud Laws To Protect HOA Members

Posted on: January 24th, 2019

By: Greg Fayard

In California, an anti-fraud bill designed to protect HOA members sailed unopposed through the legislature becoming law January 1, 2019.

The Community Associations Institute and the California Association of Community Managers sponsored the bill, which makes various changes to California’s Davis-Sterling Common Interest Development Act—the statutory scheme governing HOAs in the state. The purpose of the bill was “to take important steps to protect [HOA members] from fraudulent activity by those entrusted with the management of the association’s finances.”

The bill changed California’s Civil Code related to homeowner association money management to require any transfer of $10,000 or 5% of total association combined reserve and operating deposits (whichever is smaller) have prior written approval from the association’s board. (Civ. Code, §§ 5380(b)(6) and 5502.)

The new law prevents overly active board officers or HOA managers who pay bills or transfer funds without first getting explicit board approval. The intent of the new statute appears to require express permission for each individual transfer over $10,000 or 5% of the association’s deposits. Advance written authorization from a board is required not only for payments and withdrawals but also deposits and transfers between association accounts.

Civil Code section 5500 has required boards to at least quarterly review the HOA’s operating and reserve accounts, the reserve revenues and expenses compared to budget, the latest account statements, and income and expense statements for each HOA bank account. Under the amended Civil Code section 5500, these reviews must now be monthly, not quarterly.

Fortunately, new Civil Code section 5501 allows boards to meet the financial review requirements without meeting. The review, however, must be performed by each director or by a subcommittee consisting of the treasurer and another director, with ratification of this review noted at the next open board meeting.

The last new anti-fraud law change is new Civil Code section 5806. This statute requires all associations have fidelity (dishonesty) insurance in an amount equal to at least the total reserve funds plus three months of assessments. The insurance must include computer fraud and funds transfer fraud and must cover the association’s management company if the HOA is professionally managed.

All these changes have one purpose in mind: prevent financial fraud from being perpetrated on HOA members by their HOA leaders.

If you have any questions or would like more information, please contact Greg Fayard at [email protected].