SELF-MANAGED ASSOCIATIONS
Q.
Our association, which consists of twelve townhomes, has been
self-managed for many years in order to save money. Our newly
elected board of directors is considering the possibility of hiring
a management company which would result in an increase of our
monthly assessments. The board claims that we should save money
in the long run. What is your experience?
A.
In my experience, I have found that self-managed associations
have higher expenses in the long run than those with professional
management. Overall, self-managed associations pay more for maintenance
and repairs, have more collection problems and pay out more legal
fees because more mistakes tend to be made by the boards of these
associations. Self-managed associations tend to keep many lawyers
working overtime. Top
SUE YOUR
MANAGEMENT COMPANY
Q.
We recently learned that the management company for our homeowners
association owns a construction and maintenance company that they
have utilized to provide services to our association. The management
company did not disclose this relationship. The construction company
completed a large renovation project exceeding $500,000 only few
months ago and we're certain they made a significant profit. Can
we sue them?
A.
Yes. You can sue them for breaching their fiduciary duty as your
association's agent and for unfair business practices. In such
a suit, your association would normally ask the court to require
the defendant to reimburse all profits they made plus all legal
fees and costs incurred. You should consult with an attorney immediately
to protect your rights. Top
CONFLICT
OF INTEREST
Q.
Our management company has been using the husband of an employee
to provide maintenance services to our association for several
years. We just learned of the relationship because it was not
previously disclosed to us. Is this a conflict of interest for
the management company?
A.
Absolutely. Whenever a management company uses a related party
to provide services, it must be disclosed in writing, in advance.
This type of conduct does not reflect positively on the management
company to say the least. Top
INSURANCE
FOR PART TIME WORKERS
Q.
Our association would like to hire one part-time employee to do
maintenance work. We want to be properly insured, but the minimum
cost of insurance is too high to make it feasible. What do you
suggest?
A.
Use an employee leasing company to provide all necessary insurance
and employee benefits. Your management company should be able
to provide this service or recommend such a service. Employee
leasing companies can provide small employers with big company
benefits at a price that you can afford while providing all of
the necessary insurance coverage. Top
HIRING OF
MANAGEMENT COMPANY
Q.
I work for a management company that recently made a proposal
to manage a local homeowners association. Subject to checking
our references, the board was planning on hiring us. It turns
out that one of the board members contacted a homeowner that lives
in an association managed by our company, who was not offered
as a reference. This person provided a negative report on us which
resulted in our not getting the account. What the board doesn't
know is that this individual resents our firm because we have
had to take collection action against her several times for non-payment,
and she has been fined by the association numerous times for violating
the CC&Rs. The irony of the situation is that the board just
hired a management company composed of principals that are so
incompetent, they were recently forced to file for bankruptcy
to protect themselves from a variety of significant errors. Do
you recommend that I disclose these facts to the board?
A.
No. You owe no legal duty to the board and should not interfere
in their relationship with their new management company. What
happened is unfortunate for the board, the association and your
company, but I would take no action. Top
FINE PROCEDURES
Q.
What are the procedures that must be followed before an association
can fine one of its members?
A.
The California Civil Code sets forth the procedure for the fine
process. When the board of directors of an association is to meet
to consider or impose a fine or discipline upon a member, the
board must give notice in writing, either by personal delivery
or first class mail, at least 10 days prior to the board meeting.
The notification must contain the date, time and location of the
meeting, the nature of the alleged violation, and a statement
that the member has the right to attend and may address the board
of directors at the meeting.
If the board of directors
imposes discipline on a member, including a fine, the board must
provide a notification of the disciplinary action or fine by either
personal delivery or first class mail to the member within 15
days following the action.
The disciplinary action
or fine will not be effective against a member unless the board
of directors complies with all of the requirements of the California
Civil Code. Top
LEASING OF
UNITS BY MANAGEMENT COMPANY
Q.
The management company of our homeowners association offers rental
services to those members who desire to lease their units. Will
permitting the management company to represent individual members
in renting out their units create a conflict of interest?
A.
It will not create a conflict of interest, but it will create
a potential conflict of interest. Not withstanding the fact that
a conflict could arise, it is my opinion that permitting the management
company to represent individual members in renting their units
is generally good for the association. When a management company
rents a unit within an association, it normally takes the steps
required to screen the potential tenants. Thus, it is more likely
that the tenants will comply with the Rules and Regulations of
the association. Top
Financial Management Services
Q.
I am on the board of directors of a small homeowners association.
We really can't afford to hire a management company, but yet,
we need regular advice and basic services. What is your recommendation?
A.
Keep reading this column and visit the following website for
previously published questions and answers: HOAQandA.com. In addition, you should
consider hiring a management company to provide financial management
services. The cost is relatively modest and you will also
have an additional source of information and referrals. Top
POWER TO
HIRE MANAGEMENT COMPANY
Q.
Does the membership of our condominium association have the power
to decide whether to hire a management company, or can the board
of directors make this decision? Our board wants to hire a management
company, but many members of the association want to remain self-managed.
Our condominium association has only 21 homes. The cost of management
would be $400 per month.
A.
Unless your governing documents state otherwise, which would be
highly unusual, your board has the power to hire a management
company.
It is not unusual for the
board to want to hire a management company and for many members
to want to receive free services from their board members. In
your case, the board members are saving less than $20 per month
while bearing full responsibility for management. This does not
make economic sense for the board members.
It is important to note
that managing homeowner associations requires extensive knowledge
in many areas that your board members may or may not possess.
Also, hiring a management company eliminates many potential conflicts.
These are only some of the important reasons that boards hire
management companies. Given the litigious society that exists,
very few boards choose self-management. Top
LAW FIRM
WON'T SUE MANAGEMENT COMPANY
Q.
The management company for our townhome association gave our board
of directors some very bad advice which resulted in our association
losing several thousand dollars. Our association law firm refuses
to get involved in a suit against the management company. Our
board is finding it difficult to find an association law firm
that will sue any management company. Is this common?
A.
Yes. Most association law firms get the vast majority of their
business from management companies and thus, most of these law
firms refuse to represent associations against management companies.
Your board should continue to interview association law firms.
If they are diligent, they will find a competent firm. Top
LEGAL ADVICE
Q.
The management company for our homeowner association is constantly
calling an attorney for advice of a general nature. Our association
is being billed for the advice, which is very expensive. Is this
to be expected and what advice can you offer?
A.
Management companies should not have their association clients
billed for general legal advice.
General legal advice should
be paid for by the management company, if required. Specific legal
advice that addresses a unique set of facts, concerning an association,
should be billed to the association.
Many management companies
retain attorneys for a flat monthly fee at their cost, to answer
general legal questions. Other management companies have in-house
legal counsel to provide the same service. Since legal fees can
be one of an association's largest expenses, it makes sense to
explore all of your options by comparing the services available. Top
LICENSE REQUIREMENTS
Q.
Is managing a homeowners association considered property management?
A.
The California Department of Real Estate (DRE) does not consider
the management of associations to be property management. Consequently, a real estate
license is not required to manage associations.
Notwithstanding the position
of the DRE, most association management companies consider the
management of associations to be property management.
In reality, the management of associations involves traditional
property management responsibilities plus much more. Top
ATTORNEY
SHOULD REVIEW RULES
Q.
The management company of our association has offered to re-write
our rules. The hourly
rate is far below what our attorney would charge for the same
work. Do you have
any recommendations or comments?
A.
Yes. Your management company
would not be doing the same work as your law firm. Only attorneys
are permitted to offer legal advice. Writing rules for an association
comes dangerously close to practicing law and may cross the line.
I recommend that any new rules be written by your attorney
or at least, reviewed and approved by him or her. Top
NO CONFLICT
OF INTEREST
Q.
The attorney that represents our homeowner association owns an
interest in our association's management company. Is this a conflict of interest?
A.
No. The fact that your attorney owns an interest in your management
company is not a conflict of interest. However, your attorney has
the obligation to advise your board that he or she has such an
interest. In addition,
should a conflict or potential conflict ever arise between the
attorney's representation of your association and the interests
of the management company, he or she would be required to advise
you of such a conflict or potential conflict. In the event of an actual
conflict, the attorney would be required to advise your association
to seek other legal counsel. In the event of a potential
conflict, the attorney would be required to advise you to seek
other legal counsel or explain under what circumstances a potential
conflict can be waived. Top
KICKBACK?
Q.
The management company for our homeowners association has a website
with links to various vendors that they use for various management
clients. The vendors are required to pay the management company
a fairly substantial fee in order to be listed. Is this a disguised form
of kickback?
A.
Possibly. Without knowing the amount
of money involved it is difficult to determine if the fee is reasonable
given the cost of service provided or whether it's a means for
the management company to generate income as a result of providing
business to the vendors. In any event, at the minimum
it creates the appearance of a conflict and, in my opinion, is
evidence of poor judgment. Top
SERIOUS CONFLICT
WITH MANAGEMENT COMPANY
Q.
The management company for our homeowner association provides
maintenance services which we utilized up until about two months
ago. Our board was not happy with the maintenance services and
consequently found a replacement. Now our management company
is constantly finding fault with the new maintenance company while
our board is pleased with them. Any thoughts?
A.
Yes. When an association contracts
with a management company that provides maintenance services,
a serious conflict of interest exists between the management company
and association whether the association uses the management company's
maintenance services or not. Your association would be
best served if you used a management company that does not offer
maintenance services. This
is the only way to be assured that you are receiving unbiased
information. Top
LICENSING
OF MANAGEMENT COMPANY
Q.
In shopping for a new management company for our homeowner association,
we have noticed that some are licensed by the Department of Real
Estate (DRE) and some are not. One company that is licensed
by the DRE told us that there is an advantage to DRE licensing
because the DRE audits association accounts thus protecting homeowner
associations. Another management company
says this is not true. Who
is correct?
A.
The DRE does not audit or review association management accounts
unless under the direct control of the original developer. They
have absolutely no legal authority to do so and would refuse even
if requested by an association.
The first management company referred to has given you
incorrect and misleading information. Top
FORECLOSURE
BY LENDERS
Q.
We have had several homes foreclosed by lenders within our homeowners
association over the last few years. Our board never seems to
know when a homeowner is delinquent on his loan payments or if
a foreclosure is in process.
Is there an easy way for our board to stay informed on
these matters?
A.
Yes. Most good management companies subscribe to a service that
provides the information
you need to know on a daily basis and will provide it to
you as part of their service. Top
MANAGEMENT
COMPANY SELLING HOMES
Q.
The management company for our homeowners association has a real
estate brokers license.
From time to time they have taken sales listings from members
of our association as have other real estate brokers and agents
who are not involved in the management of our association.
A competitor of our management company-broker insists that
it is a conflict of interest for our management company-broker
to represent sellers and buyers and has convinced several members
of the association to complain to the board, claiming that an
unfair advantage and conflict exists. While the board has cited
no legal authority, it has nevertheless sided with the complaining
broker. Is there
a conflict of interest in your opinion and what should the board
do?
A.
There is no conflict of interest and the board should be pleased
that you are representing members in selling their homes as well
as potential buyers.
Both sellers of homes and
their brokers/real estate agents have a legal duty to make disclosures
about the listed home and association. These disclosure requirements
include matters that are both known and those that should reasonably
be known. These disclosures are required by law in order to protect
both the buyer and seller.
When a real estate broker
or agent representing a buyer, seller, or both is also the management
company, the broker or agent will undoubtedly know much more about
the association than other brokers and agents in the community.
This additional knowledge places an extra burden on the
broker or agent to make disclosures that other brokers and agents
would not always be required to make.
Consequently, both buyers and sellers doing business with
the broker who is also managing are afforded more protection,
not less. I believe
this to be the interest of
buyers, sellers and the association.
Full disclosure results
in fewer disputes and less litigation. It also results in a more
harmonious community which tends to result in higher prices.
The broker who has complained
to the board is simply attempting to eliminate competition.
It also appears that the complaining broker is dangerously
close to committing the tort "Intentional Interference with Prospective
Economic Advantage" or possibly "Negligent Interference with Prospective
Economic Advantage." This is a matter you should
discuss with legal counsel. Top
NEW DIRECTOR
Q.
I was recently elected to the board of directors of my homeowner
association and am somewhat at a loss as to how I can best prepare
for my responsibilities. Can you provide me with a list
of what I should do?
A.
I suggest the following:
A. First, read the following:
(1) Bylaws of the association;
(2) CC&Rs (Covenants, Conditions and Restrictions);
(3) Rules (if applicable);
(4) Contract with management company;
(5) Latest reserve study;
(6) Most recent budget;
(7) Minutes of board meetings for the last twelve months;
(8) Minutes of the last annual meeting of owners (members);
(9) Monthly financial reports for the last twelve months;
(10) Insurance policy(ies) of the association; and
(11) Management company inspection reports for the last twelve
months.
Your management company
should provide you with any of the items listed that you need.
B. Ask your management
company representative to provide you with an update, along with
current legal compliance schedule for associations. Review their web site for
possible helpful information.
C. Ask you association
attorney for an update, if any legal matters are pending. Review their web site for
possible helpful information. Normally, a law firm will
not charge for such an update. Top
CONFLICT
OF INTEREST
Q.
The management company for our homeowners association provides
maintenance services which makes me uncomfortable. Is there a
problem with this arrangement?
A.
Yes. When a management company provides maintenance services to
an association, it creates a conflict of interest which cannot
be addressed satisfactorily. Management companies have the responsibility
(a fiduciary duty) for making certain that their clients receive
the greatest value possible for every dollar spent on maintenance
services. This means the management company must make certain
that their clients do not pay an excessive billing rate, do not
pay for an excessive number of hours billed, do not pay for inferior
work, do not pay for unnecessary work, and that maintenance is
scheduled so as to minimize the number of service calls in order
to minimize your overall cost.
Companies that provide
maintenance services are in business to maximize their profit.
This legitimate goal is in direct conflict with the property owner's
goal of minimizing maintenance costs. We believe a management
company cannot reconcile this conflict of interest if it provides
maintenance services to its client. For example, it is possible
that the need to meet payroll costs could influence the management
company's judgment as to how much maintenance is "necessary" at
your property.
A management company that
hires only independent, third party maintenance companies has
the incentive and ability to fully protect property owners without
regard to the profitability of the maintenance operation. A management
company that provides maintenance services may not have the same
incentive or ability.
By law, a management company,
as agent for the association, has the duty to put your interest
above its own. Your management company should do exactly that. Top
DUTIES OF
MANAGEMENT COMPANY
Q.
I recently purchased a residence within a homeowners association
through a local real estate agent. The agent told me to obtain
a garage door opener and mail box key from the management company.
The management company told me they have no responsibility for
providing these items and that the real estate agent should have
arranged to get them for me. Who is correct?
A.
The management company. Any experienced real estate agent would
have arranged to get these items for you. The management company
is absolutely correct. Top
CONFLICT
OF INTEREST
Q.
Please define "conflict of interest."
A.
A conflict of interest exists where an individual's duty to one
party leads to the disregard of a duty to another. It exists when
an outside influence affects a person's ability to make an independent,
unimpeded, objective decision or when a person owes duties to
separate parties with conflicting interests.
Whether or not a conflict
of interest exists depends on the facts of a particular situation
which must be evaluated on a case-by-case basis. Top
USE OF COMMON
AREA
Q.
I live in a townhome community. I recently learned that our former
management company terminated its relationship with our board
of directors and association because it was informed by the majority
of the board that they were intending to grant the exclusive right
to use a part of the common area to a member of the association.
I have been told that when the management company advised the
board not to proceed and its advice was rejected, it terminated
the management agreement. Any thoughts?
A.
Your former management company did the right thing. Any management
company that would associate with your current board is taking
a big risk. Your association should replace the board members
who agreed to the decision that you described. In addition, you
should replace any management company that would acquiesce in
such conduct. Top
MANAGEMENT
COMPANY CONFLICT
Q.
I am employed as a property supervisor for a large property management
company that provides maintenance and landscaping services to
our homeowner association clients. The problem is that my employer
provides inferior services at a high price. The clients expect
me to provide them with good service at a reasonable price. My
company continues to overcharge and expects me to deal with the
association clients and their complaints. What do you recommend?
A.
You should find new employment. Your employer has a significant
conflict of interest with its management clients and is taking
unfair advantage of its client relationships.
In my opinion, an association
should avoid such situations and you should also. Don't let your
employer's conduct reflect on you. Top
MANAGEMENT
COMPANY AND CONSTRUCTION DEFECTS
Q.
We recently purchased a new townhome directly from the developer.
After moving in, I was elected to the board of directors and learned
that many owners are experiencing serious construction problems.
Our management company was hired by the developer. They seem to
minimize the significance of the construction defects. Do they
have a conflict of interest?
A.
Possibly, but not necessarily. I believe the fact that your management
company was hired by the developer, taken by itself, is insufficient
to cause alarm. However, you should inquire to determine whether
your management company obtains a substantial number of its property
management accounts from developers. If so, they may be inclined
to protect their source of business.
Some management companies
decline to accept property management accounts from developers
in order to avoid even the appearance of a conflict of interest.
Others obtain most of their business from developers.
My advice to investigate
throughly. Afterwards, if your board is not 100% satisfied that
your management company is totally loyal to your association,
make a change. Construction defects are a serious matter. Top
SUSPENSION OF ASSOCIATION
Q.
How can I determine if my homeowner association has been suspended by the California Secretary of State?
A.
First, go to the California Secretary of State website: www.ss.ca.gov Then click on the “California Business Portal.” Next, click on “California Business Search.” Type the exact name of your association into the “Corporations Search Bar” and click on “search.” The exact name will be found in the Bylaws. When the name comes up on the screen, click on it. The “status” will indicate either “active” or “suspended.” Top
SAFETY GLASS
Q.
My rental home was built before shower doors and sliding glass doors were required to have safety glass. My property has standard glass in both the shower doors and sliding glass door. I prefer not to spend the money to replace the glass. Is it necessary?
A.
I strongly recommend that you replace the ordinary (annealed) glass with tempered glass or laminated glass, both of which are considered safety glass. Ordinary glass can break into dangerous shards that can cause horrific lacerations, resulting in major injuries and possibly death. The cost of replacement is nominal when contrasted to the possible harm from an accident.
Replacing ordinary annealed glass with safety glass will help to prevent injuries resulting, in part, from common accidents as well as earthquakes, wind storms, and even explosions.
Conflict
of Interest with Law Firm
Q.
Our homeowner association needed a referral to a law firm that
would represent us on a contingency basis. Our management company
made a referral and our board of directors subsequently signed
an agreement with the law firm that was referred to us. The retainer
agreement called for the law firm to receive 40% and the management
company to receive 10%. The management company was required to
provide some minor administrative assistance to the law firm.
The case settled for millions of dollars and consequently the
management company was paid several hundred thousand dollars for
less than $2,000 worth of services! The members were never informed
of the arrangement. As a member of the association, I am very
concerned about this situation. What do you suggest?
A.
You should be concerned about your board, the law firm representing
your association and your management company. The situation you
described calls for a confidential consultation.
Management
Agreement
Q.
Our condominium HOA solicited and received a proposal for property
management services. The proposal indicated that it was valid
for sixty days. Our board did not get around to responding to
the offer for more than ninety days and when we did so, the management
company informed us that they were “no longer in a position to
take on our property.” We were not expecting this to happen and
are greatly disappointed. Does this happen often?
A.
It doesn’t happen often, but it does happen. When a management
company makes a proposal, it is implied that they have the capacity
in terms of personnel to manage the property at that time. If
time passes and the management company accepts other business,
it may not be able to provide quality services to other accounts.
Association
Sued by Member
Q.
Our management company recently recorded an assessment lien against
the property of a delinquent homeowner. Before recording the lien,
they carefully read the CC&Rs and then followed the requirements,
only to find out afterwards that the CC&Rs were outdated and did
not reflect the current law. As a result, we were sued by the
delinquent homeowner and forced to pay a large sum of money to
settle the case. Can we recover from our management company?
A.
I believe you have a good negligence case. Your management company
fell below the standard of care by failing to comply with the
current legal requirements. The recordation of liens can have
serious consequences and should be supervised by an attorney.
The situation you have described clearly illustrates the importance
of amending your association’s CC&Rs in order to make certain
they reflect current law.
Pitbull
