PROTECTION FOR ASSOCIATIONS AGAINST TRICKY LENDERS (October 2012)

On September 7, 2012, the Governor signed into law Assembly Bill No. 2273, adding Section 2924.1 to the California Civil Code. Now, when a mortgage lender forecloses on property in a common interest development, the transfer of title to the purchaser (the Trustee’s Deed Upon Sale in a non-judicial foreclosure) must be recorded within 30 days after the sale. Previously, there was no requirement that the deed be recorded. Consequently, the purchaser, who often is the lender itself, was able to conceal the sale from the homeowners association and, thereby, avoid responsibility for paying the assessments as the new owner. The new law helps safeguard against this practice.

Further enhancing this safeguard is a second feature of Assembly Bill No. 2273, which amended Civil Code section 2924b as it concerns homeowners associations' requests that copies of Notices of Default and Trustee's Deeds Upon Sale be mailed to the association. As before, associations may record such requests, and if an association does so before the Notice of Default is recorded, the trustee or lender must mail the Notice of Default and Trustee’s Deed to the association. However, under the old law, the deadline for mailing these documents was 15 days after the Trustee’s Deed was recorded. If the Trustee’s Deed was not recorded, whether to conceal the sale or for some other reason, there was no requirement to mail the documents, further depriving the association of another opportunity to learn of the sale. Now, section 2924b, as amended by A.B. 2273, requires that the documents be mailed within 15 days after the trustee's sale.

The failure to comply with either of these requirements – recording the Deed within 30 days or mailing the Notice of Default and Trustee’s Deed to the association within 15 days – does not invalidate the sale or affect the purchaser’s title to the foreclosed property. However, to the extent that the failure to comply with either requirement causes the association to suffer or incur a loss (e.g., inability to collect assessments), the association may have a cause of action against the trustee and/or the lender.

RENT SKIMMER OR INNOCENT ASSOCIATION (August 2012)

In this era of high delinquency rates and association foreclosures, associations acquiring units encumbered by a senior mortgage should be weary of potential rent skimming issues. As unfair and counter-intuitive as it seems, when an association acquires a unit that has a senior mortgage, using any rent received during the first year after acquiring the unit, for any purpose other than paying amounts due on the mortgage, is “rent skimming,” even though the association otherwise has no obligation to pay the mortgage. Civ. Code § 890(a)(1).

Rent skimming is declared to be unlawful. Civ. Code § 891(f). However, the circumstances under which it is actionable are limited. Civ. Code §§ 891 & 892. The circumstances applicable to associations in most cases involve a lawsuit brought by a lender, a lawsuit brought by a tenant, and criminal prosecution.

A mortgage lender may sue a person who has committed “multiple acts of rent skimming,” whether or not the person has become contractually bound to pay the mortgage. Civ. Code § 891(c). The phrase “multiple acts of rent skimming” is statutorily defined to mean “knowingly and willfully rent skimming with respect to each of five or more parcels of residential real property acquired within any two-year period.” Civ. Code § 890(b).

A tenant may sue a person who has engaged in rent skimming if the mortgage lender forecloses, and the tenant is required to move. Civ. Code § 891(d). Multiple acts of rent skimming are not required for a tenant to sue, and a tenant may sue even if the association received rent from only the unit the tenant occupies.

Criminal prosecution for rent skimming requires “multiple acts of rent skimming,” like liability to a mortgage lender. Civ. Code § 892(a). One court has held that an owner can be prosecuted if rent is received and used intentionally with knowledge that the mortgage is not being paid, even with an innocent motive, no evil intent, and ignorance that it is illegal. People v. Bell (1996) 45 Cal.App.4th 1030, 1042-1043.

The potentially liable or prosecuted persons, in addition to the association itself, include the officers, the directors, and anyone who authorizes rent skimming or who, being in a position of control, fails to prevent another from rent skimming. Civ. Code § 890(c).

There are multiple benefits to foreclosing on units even though rents received in the first year are supposed to be applied to amounts due on the mortgages. Those benefits include demonstrating that the Association takes collections seriously, removing “deadbeat” owners who otherwise would continue to plague the association while the mortgage lenders take a long time to foreclose themselves, being able to keep the rents collected after the first year if the senior mortgage lender does not foreclose in that time (as has seemed to be the case in the last few years), and enabling the association to evict “deadbeat” tenants.

After acquiring a unit that is already occupied by a tenant or before renting out a vacant unit, associations should consult legal counsel to strategize on addressing the rent skimming issues.

ASSOCIATIONS CAN SUE OWNERS’ BROKERS (June 2012)

In a very recent case, the Second District Court of Appeal held that a homeowners association can sue the unit owners’ real estate brokers when the brokers’ misconduct pertains to damage to the common area or separate interest that the association is obligated to maintain or repair, even though the association did not hire the brokers (i.e., the brokers owed a duty to the owners, not the association). This result can have broader application, enabling community associations to sue third parties, with whom the association has no contractual or other relationship, for their misconduct “pertaining” to damage to the common area or a separate interest that the association is obligated to maintain or repair.

The case was Glen Oaks Estates Homeowners Association v. Re/Max Premier Properties, Inc. (2012) 203 Cal.App.4th 913. That case involved a slope failure along a common area slope and driveway, resulting in the Association becoming embroiled in lawsuits against other parties and incurring $3 million in repair expenses.

The Association sued the brokers, who jointly represented the owners and developers in the original sale of the units, alleging that the brokers advised the developers to lower the monthly HOA dues so that the parcels would not fall out of escrow and then intentionally provided a false budget and deceptively low monthly dues statement to the owners; failed to provide the required public report to the purchasing owners and to inform them that a public report was required; and failed to warn the owners that the soil reports, used as the basis for the construction of the common roadway and common area slopes, might not be legitimate, despite having information constituting undeniable bases for questioning the reliability or validity of the soil reports (e.g., the brokers received material information that the soils engineer may not have been validly licensed and did not have errors and omissions insurance; some of the soil reports lacked a signature and/or seal of an engineer or geologist; the body of one or more soil reports referenced testing, investigation, and grading of a different property; and the body of one or more soil reports referenced a nonexistent report).

The brokers contended that the Association has no standing to sue them because they owed a duty to the owners, not the Association. Relying on Civil Code section 1368.3, the court disagreed and held that the Association has standing to sue the brokers even though the Association was not a party to the sales/purchases of the units. Under section 1368.3, a community association has standing to institute litigation in its own name, as the real party in interest and without joining with it the individual owners, in matters pertaining to damage to the common area, damage to a separate interest that the association is obligated to maintain or repair, and damage to a separate interest that arises out of, or is integrally related to, damage to the common area or a separate interest that the association is obligated to maintain or repair. The court found that the matter of the brokers’ misconduct pertained to damage to the common area (i.e., the failed slope and driveway), giving the Association standing to sue the brokers.

REDEMPTION AFTER FORECLOSURE (March 2012)

When a community association forecloses on a separate interest/unit, the owner has a right of redemption within 90 days after the foreclosure sale.  Code of Civ. Proc. § 729.035.   If the owner redeems the unit, the foreclosure sale is canceled.   Code of Civ. Proc. § 729.080(d). This right of redemption has ramifications for the association if the association is the purchaser at the foreclosure sale.

The association is not entitled to possession of the unit until after the 90-day redemption period, but the association is entitled to the rents and profits from the unit, or the value of use and occupancy of the unit, during the 90-day redemption period.  Code of Civ. Proc. § 729.090(a). 

Although the association is not entitled to possession during the redemption period, it has the right to enter the unit during reasonable hours to repair and maintain the premises. Code of Civ. Proc. § 729.090(c).  The association may do so without notifying the owner, unless the owner is living in the unit.  Barry v. OC Residential Properties, LLC (2011) 194 Cal.App.4th 861, 868.  As a general rule, the association may make such repairs as are reasonably necessary for the preservation of the property, but not permanent improvements or things beyond what is proper to keep the premises in necessary repair.  Id. at 871.

To redeem the unit, the owner must pay the redemption price, which includes (1) the purchase price that the association paid at the foreclosure sale; (2) the amount of any assessments or taxes and reasonable amounts for fire insurance, maintenance, upkeep, and repair of improvements on the property, even if performed by an unlicensed contractor; (3) any amount paid by the association on a prior obligation secured by the unit (e.g., the mortgage) to the extent that the payment was necessary to protect the association’s interest; and (4) interest on these amounts.  Code of Civ. Proc. § 729.060(b); Barry v. OC Residential Properties, supra, 194 Cal.App.4th at 870.  However, the redemption price is reduced by any rents and profits from the unit paid to the association or the value of the use and occupation of the unit to the association.  Code of Civ. Proc. § 729.060(c).

If there is a dispute over the proper amount of the redemption price, the owner may petition the court for an order determining the redemption price, provided that the petition is filed before the expiration of the redemption period, and the owner deposits the undisputed amount with the foreclosure trustee. Code of Civ. Proc. § 729.070(a). If the owner does so, the court determines the amount required to redeem the property based upon affidavit or other evidence satisfactory to the court. Code of Civ. Proc. § 729.070(f). In that determination, the owner has the burden of proof. Code of Civ. Proc. § 729.070 (e).

SOLAR POWER VERSUS ASSOCIATION REGULATORY POWER (November 2011)

In a recent case last month, Teroso Del Valle Master Homeowners Association v. Griffin, the Second District Court of Appeal upheld a homeowners association’s power to regulate homeowners’ installation of solar energy systems.  Although under California law associations cannot prohibit the installation or use of solar energy systems, associations may impose reasonable restrictions on them. 

To be reasonable, the restrictions must either (i) not significantly increase the cost of the system proposed by the homeowner or significantly decrease its efficiency or performance or (ii) allow for an alternative system of comparable cost, efficiency, and energy conservation benefits.  (For a solar water or swimming pool heating system, “significantly” means an increase in cost of more than 20 percent or decrease in efficiency by more than 20 percent, as originally specified and proposed; for a photovoltaic system, “significantly” means an increase in cost of more than $2,000 over the cost as originally specified and proposed, or a decrease in efficiency of more than 20 percent as originally specified and proposed.) 

An application for approval of a solar energy system must be processed and approved/denied in the same manner as an application for any modification or alteration to the common area or units (e.g., by an established architectural control committee in accordance with adopted architectural standards). The approval or denial must be in writing. If an application is not denied in writing within 60 days after it is received, it is deemed approved, unless the delay is the result of a reasonable request for additional information.

The association’s restrictions may take into account not only health and safety considerations, but also aesthetics. When the association’s governing documents do not prohibit all solar energy systems, but rather permit systems that are comparable in cost and performance and are aesthetically acceptable, the solar system regulations are enforceable.

BOARD BUSINESS WILL NEVER BE THE SAME:
CHANGES IN MEETING PROCEDURES
(October 2011)

The California Legislature has further amended the Davis-Stirling Common Interest Development Act to impose restrictions on how association boards of directors conduct business. The changes enacted through Senate Bill 563 will take effect on January 1, 2012 and include the following: 

Members must be given notice of the time and place of all open board meetings at least four days before the meeting (unless the bylaws provide for a longer period of notice), even if the time and place are fixed by the bylaws. Members must be given notice of the time and place of all executive session board meetings at least two days before the meeting, even though the members are not entitled to attend. The only exception to these notice requirements is for emergency meetings. The notices for both open and executive session meetings must contain the agenda for the meeting. 

Notices of board meetings may be given to members electronically if the member consents. 

The notice of open board meetings held by teleconference must identify at least one physical location so that members may attend. At least one board member must be present at that location. 

The board may not take action on any item of business outside of a meeting; boards no longer will be able to take action by unanimous written consent in lieu of a meeting. 

The board cannot conduct meetings, open or executive session, via a series of electronic transmissions (e.g., electronic mail), except for emergency meetings if all board members consent in writing to the action taken and if the written consents are filed with the minutes of the meeting. 

At special meetings of the members, the board may present for action only matters that were stated in the notice of the meeting. 

Agendas for executive session board meetings are no longer excluded from the records that members can request from the association.