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SELF-MANAGED ASSOCIATIONS

Q. 
Our association in Artesia, 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 in Los Angeles 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 in Sylmar. 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 in Agoura Hills, 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 in Simi Valley 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 in Los Angeles, 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 in Valencia 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 in Reseda 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.Top


CONFLICT OF INTEREST WITH LAW FIRM

Q. 
Our homeowner association in Santa Clarita 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. Top


MANAGEMENT AGREEMENT

Q. 
Our condominium HOA in Moorpark, 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. Top


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.Top


PITBULL

Q. 
Someone just moved into our condominium association in Cerritos, with a large pitbull dog. It hasn’t attacked anyone, but it is very aggressive and nearly everyone is concerned about it. Our CC&Rs are silent on the subject expect for permitting members to own up to two domestic animals. What should we do?

A. 
It would have been easier to prevent this problem by amending your CC&Rs before the pitbull was brought onto the property. Attempting to deal with the problem after the fact is much more difficult, but not impossible. The dog may constitute a nuisance which is probably a violation of your CC&Rs. More facts are needed to adequately answer your question. The lesson is clear, however: It is far better to address these types of issues with a CC&R amendment before the anticipated problem becomes a real problem. Top


BIDS

Q. 
Should our association board expect our management company to write bid
specifications?

A. 
No. Your board should ask the management company to have appropriate experts write bid specifications. The expert who writes the specifications should not submit a bid for the work in order to keep him or her as objective as possible. For large projects, the board should consider hiring a construction manager.Top


BUDGETS

Q. 
Our association in Santa Monica is self-managed. We do not have anyone capable of preparing a reliable budget. What do you suggest?

A. 
First, you should hire a management company that is capable of preparing your budget. If you don't hire a management company, your association should interview reserve study providers. Some of these firms will prepare association budgets for a fee. Top


THEFT OF HOA FUNDS

Q. 
Our homeowner association in Glendale has been self managed for many years. We have only 8 units. Our treasurer of twelve years recently embezzled most of our funds and now claims that she doesn’t have the ability to repay the association. What are our options?

A. 
This is a fairly common question without a simple answer. Your best course of action can only be determined after an examination of your association’s insurance policies, a determination of whether your former treasurer has equity in her home, and possibly a professional asset search. Sometimes we find that the guilty party has quietly cancelled the coverage for dishonest acts in an attempt to discourage the association from attempting to obtain restitution. Your association needs to consult with an experienced attorney to determine the best course of action.

One lesson is clear. It is dangerous for an association to place its funds under the control of one person or even two related people. There is no substitute for accounting checks and balances.  Top


COMPETITIVE BIDS

Q. 
We live in a common interest development. Based on the recommendation of our management company, our board of directors obtained three bids for landscaping maintenance and then selected the company with the highest bid. The bids were for identical work. Since all three companies were proposing to do the same work, shouldn’t our board have selected the lowest bid? Our monthly assessments are already too high and many of us live on fixed incomes.

A. 
The board should use its best judgment in deciding which company to use, based on all facts available. This is their legal duty. While the three companies may have submitted bids for the same work, it does not logically follow that all three companies will provide the same quality of work. Sometimes experience is helpful in determining which company will provide the highest quality work and, likewise, who will be the most reliable contractor. One of the advantages of hiring an established local management company, is that they have experience with contractors and can provide valuable recommendations to the board of directors.Top


NEIGHBORHOOD WATCH

Q. 
Our condominium association in Westchester is experiencing a high level of vandalism and other criminal activity. In your experience, does a neighborhood watch program help?

A. 
An active neighborhood watch program can be an excellent deterrent to crime. Your association's management company should be able to assist you in establishing one for your community or you can get information on the internet. Most neighborhood watch groups will suggest the use of surveillance cameras and burglar alarms to maximize the safety of your members and their property.Top


RESERVE STUDIES

Q. 
What is a reserve study?

A. 
It is a written report that evaluates the common area of the association. It provides guidance on how much your association should be setting aside each month for reserves so it can meet its future obligations without special assessments. Reserves are needed to pay for the replacement of common area components such as roofs and parking lots and to pay for major maintenance items such as exterior painting. The California Civil Code sets forth the minimum requirements for reserve studies. Your association's management company should have the in-house expertise to prepare a reserve study since it is part of the budgeting process.Top


MANAGEMENT COMPANY RECOMENDATION

Q. 
Does your law firm provide recommendations for management companies? Our condominium association in Inglewood has had two unsatisfactory experiences with large management companies that we don't want to repeat.

A. 
If requested by a client of the firm, we provide such recommendations. Over the course of many years, our attorneys have had the opportunity to deal with numerous management companies in various locations throughout California. We have developed great respect for some of those management companies. On the other hand, we have been required to file lawsuits against a few management companies on behalf of our HOA clients alleging negligence or intentional wrongdoing. Please keep in mind that the recommendation of any law firm should be based upon their direct experience with any management company recommended or not recommended.

Given that law firms will not have had dealings with some management companies or their experience has been limited, often a recommendation based on experience is not possible. However, a law firm can always assist by providing key questions to be asked during the interviewing process.Top


BOARD MEETING NOT HELD

Q. 
The board of directors of our homeowners association has not held an annual meeting to elect new directors for more than 18 months even though our bylaws require an annual meeting to be held. I have requested that our "annual" meeting be held, but have been ignored. What can I do?

A. 
If a corporation with members is required by its bylaws to hold a regular meeting and fails to do so for a period of sixty days after the date designated, or if no date has been designated, for a period of fifteen months after its last regular meeting, the superior court of the county may summarily order a meeting to be held upon application of a member after notice to the board giving it an opportunity to be heard. Top


INSPECTION OF ELECTIONS REQUIRED

Q. 
Many of the members of our homeowners association don't trust the board to accurately count the ballots at our next annual meeting. Do you have any suggestions?

A. 
Yes. The California Corporations Code sets forth a procedure for appointing "inspectors of election."

Prior to any meeting of members, the board may appoint inspectors of election to act at the meeting. If inspectors of election are not so appointed, the chairman of the meeting may, and on the request of any member, appoint inspectors of election at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more members, the majority of the members represented in person or by proxy shall determine whether one or three inspectors are to be appointed.

The inspectors of election shall determine the number of memberships outstanding and the voting power of each, the number represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies, and do such acts as may be proper to conduct the election or vote with fairness to all members.  Top


DEVELOPMENT OF BUDGETS

Q. 
What are the most common errors made by homeowner association boards and management companies when preparing their HOA budgets?

A. 
Following are the most common budget errors:

Not including a realistic allowance for bad debts. This requires evaluating current receivables and examining historical financial data;
   
Updating the association’s calculation of reserve contributions;
   
Omitting a contingency factor line item of 3% to 5%;
   
Making the assumption that every item in last year’s budget should be the starting point for next year’s budget. The prior year budget must be evaluated line by line;
Failing to recognize that insured claims require the payment of the deductible which must be included in the budget;
   
Not recognizing that some homeowner claims, such as water intrusion from the common areas, may not be covered by insurance. These types of claims may include interior damage to personal property for which the HOA may have liability;
   
Omitting an allowance for legal fees to cover the cost of legal advice for the board;
   
Deciding to defer necessary maintenance into the future in order to minimize the monthly assessments. This is likely to cost the members of the association far more in the long run;
   
Making the political decision not to increase the budget when reality requires an increase; and
   
Deciding to make future special assessments instead of increasing the regular monthly assessments.  Top
   

HOA SUSPENDED

Q. 
Our association's management company recently informed the board that the corporate status of the association had been suspended. How does a homeowner association become suspended and what are the consequences?

A. 
Possible reasons for suspension are:

Failure to pay taxes,
Failure to file taxes,
Failure to file a Statement by Domestic nonprofit Corporation, or
Failure to file a Statement by Common Interest Development

The consequences include the loss of:

The right to bring and defend lawsuits,
The right to collect assessments,
The right to enforce contracts with contractors and vendors, and
The right to enter into contracts.

A suspended corporation (association) can be revived. When this occurs, a Notice of Revivir is provided by the Secretary of State.  Top


HOA SUSPENSION

Q. 
What happens if our homeowners association has been suspended by the Secretary of State?

A. 
This is a serious problem. Most importantly, your association may not be able to defend itself in court or use the courts to assert its rights. There are also fines to pay and other legal consequences. You should have your association attorney or CPA resolve any deficiencies and most importantly, determine the reason for the suspension. Usually, suspensions result from the failure to file tax returns or other required forms. If your management company is solely at fault, it should pay any fines and costs.  Top


FINANCIAL STATEMENT REQUESTED

Q. 
I own a townhome in Santa Monica, but am not on the board of directors. While attending a recent board meeting, I asked our management company representative for a current financial statement. My request was denied and I was told that I am only entitled to a year-end report. Is this correct?

A. 
No. California law requires a board of directors to provide every member with a year-end financial report but it does not preclude you from receiving interim reports. You are entitled to a monthly report, less the member delinquency report, but will be required to pay the cost of duplication. You are also permitted to inspect association records for any association related purpose.  Top


UNLICENSED CONTRACTOR

Q. 
What is the penalty for contracting without a license when one is required?

A. 
Contracting without a license is a misdemeanor punishable by up to one year in county jail and/or a fine of up to $15,000.  Top


BID SPECIFICATIONS

Q. 
Should our association board expect our management company to write bid specifications?

A. 
No. Your board should ask the management company to have appropriate experts write bid specifications. The expert who writes the specifications should not submit a bid for the work in order to keep him or her as objective as possible. For large projects, the board should consider hiring a construction manager.  Top


HOA INVESTMENTS

Q. 
Our homeowner association in Beverly Hills recently lost money on its mutual fund account. Is a board of directors allowed to invest association funds in a mutual fund?

A. 
Absolutely not. All funds must be placed in an insured account in a bank, savings and loan association or credit union. Top







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