New State Condo Law Allows Reduced HOA Assessments for Designated Affordable Units

| Jay Drake

We are following up on a previous update where we discussed Assembly Bill 572.  After undergoing a few amendments in the State legislature, the Bill passed and became effective January 1, 2024.  AB 572 amended Section 5605 of the California Civil Code, which is part of the Davis-Stirling Common Interest Development Act.

The amended law, with certain exceptions, prohibits a homeowners association (HOA) that records its original declaration (CC&Rs) on or after January 1, 2025, from imposing an increase of a regular assessment on the owner of a deed-restricted affordable housing unit that is more than 5% plus the percentage change in the cost of living, not to exceed 10% greater than the preceding regular assessment for the HOA’s preceding fiscal year.

In a significant break from previous State law and regulations, a qualifying HOA may impose an assessment against an owner of a deed-restricted affordable housing unit that is lower than the assessment imposed against other unit owners according to the proportional ownership of total subdivision interests subject to assessments.  This change would appear to allow an HOA to require market-rate unit owners to subsidize affordable unit owners with respect to payment of certain HOA assessments.

The new law is not all encompassing.  As stated above, it only applies to new common interest developments that record their original CC&Rs on or after January 1, 2025.  It also does not apply to any of the following:

  • A development of 20 units or fewer.
  • A development where the percentage of the units that are deed-restricted affordable housing units exceeds the percentage required by an applicable zoning ordinance in effect at the time the development received final approval.
  • A development that is located within a city, county, or city and county that does not have an applicable zoning ordinance requiring a percentage of deed-restricted affordable housing units and meets either of the following conditions:
    • The percentage of the units that are deed-restricted affordable housing exceeds 10 percent of the total number of units in the development at the time the development received final approval.
    • For certain other developments that were approved for streamlined processing pursuant to Section 65912.124 of the Government Code, the percentage of the units that are deed-restricted affordable housing exceeds 15 percent of the total number of units in the development at the time the development received final approval.

The well-intentioned law is designed to protect owners of designated affordable housing units from large increases in HOA assessments.  Owners of affordable housing units are typically low or moderate income and large increases in HOA assessments can be a financial burden, and can jeopardize their ability to afford the HOA assessments along with the monthly mortgage and other costs of home ownership.

Critics of the new law argue that it could lead to disproportionate financial burdens on homeowners who cannot afford to subsidize others as well as create inequities and divisions within the community by identification of a class of affordable housing or low-income owners, which could lead to resentment among other owners.

Critics also point out that the law may undermine the ability of HOAs to raise the necessary funds to maintain the community by limiting assessment increases for all owners in the HOAs effort to avoid unequal assessments, resulting in artificially low budgets, and/or deferred maintenance and repair obligations.  Artificially low assessments could eventually require multiple special assessments to fund HOA budget shortfalls.

Authored by Reuben, Junius & Rose, LLP Attorney Jay Drake.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

State Law Would Limit HOA Assessments for Affordable Units

| Jay Drake
affordable unit

Assembly Bill 572, introduced by Assembly Member Matt Haney of San Francisco, would place a cap on assessment increases a condominium homeowners association (HOA) could impose on a deed-restricted affordable unit, subject to certain exceptions.  AB 572 would amend California Civil Code 5605, part of the Davis-Stirling Common Interest Development Act, to prohibit an increase of the HOA regular assessment for a deed-restricted affordable unit that is more than 5% greater than the preceding year’s regular assessment, or that is greater than the annual percentage change in cost of living, whichever is larger.  The maximum increase for a deed-restricted affordable unit would be 10% greater than the preceding year’s regular assessment.  The “percentage change in the cost of living” would be determined using the Consumer Price Index for the region where the project is located.  The limitation would not apply to a development where 30% or more of the units are deed-restricted affordable units.

Civil Code Section 5605 already provides that an HOA board of directors may not impose a regular assessment that is more than 20% greater than the regular assessment for the HOA’s preceding fiscal year without the approval of a certain number of the HOA members.  The proposed amendment to Section 5605 would extend this existing rule by further limiting such increases as applied to deed-restricted affordable units.

Under current state law, there is no difference between the assessments paid by affordable and market-rate units.  Having one group of owners pay more and subsidize another group of owners who receive the same benefits and services is not allowed.

It may be well-intentioned, but AB 572 is somewhat controversial and opposed by some industry groups for a few reasons.

This new law could result in the affordable units paying less than the market-rate units for the same services and benefits.  This disparate treatment could breed resentment from the market-rate owners, who were not part of the original approval of the project and imposition of affordable housing requirements, yet could be burdened with the responsibility of paying a disproportionate share of assessments and subsidizing the affordable units in the project.  This could be viewed as unfair to the market-rate unit owners.

This new law is also seen by some as designating affordable unit owners as a separate class of homeowners, which could create inequities and sow division among the residents of the community.

There is also concern that in order to avoid any controversy, an HOA might decide to cap all increases in HOA assessments at an artificially low amount in order to keep the assessments the same for all units.  This could result in an HOA reducing services and deferring necessary maintenance, and could also result in large special assessments down the road to make up for insufficient HOA funds.

AB 572 is currently processing in the State legislature. We will continue to monitor and report back if the bill passes and becomes law.

 

Authored by Reuben, Junius & Rose, LLP Partner Jay Drake.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

New State Laws Affecting Condo Homeowners Associations

| Jay Drake
HOAs

There are relatively fewer new state laws affecting condominium homeowners associations (“HOAs”) in 2023 than in recent years. However, one particular bill was passed by the California State legislature that includes important changes condominium owners and HOAs should be aware of.  Assembly Bill 1410 made a few significant changes to the Davis-Stirling Common Interest Development Act, which is the primary state law affecting condos and HOAs.  These new laws became effective January 1, 2023.

As we have previously reported over the past few years, the state legislature has been making an effort to increase affordable housing in the state.  To that end, the ability of HOAs to restrict rentals of condo units has been curtailed.  Assembly Bill 3182, passed in 2020, amended Civil Code Section 4740 to limit the power of HOAs to enforce restrictions on a homeowner’s ability to rent his or her unit.  AB 3182 also added new Civil Code Section 4741, which provides that HOAs cannot require a minimum rental term of greater than thirty (30) days.  Section 4741 also states that HOAs cannot enforce a cap on the number of units that may be rented at greater than 25%.  Units that are owner-occupied where only a portion of the unit is rented, or an accessory dwelling unit (ADU) that is part of the unit is rented, do not count towards any such rental cap.  The effect of this is to limit restrictions on rental of ADUs and a unit owner’s ability to rent rooms in his or her unit.

AB 1410 furthers the state legislature’s objective of increasing affordable housing by adding a new section 4739 to the Civil Code.  Section 4739 provides that an HOA’s governing documents cannot prohibit an owner from renting out a portion of his or her unit so long as the owner occupies the unit and the rental term is for more than 30 days.  This has the effect of allowing more short term rentals so long as the rental period is for more than 30 days.

AB 1410 also amends Civil Code Section 4515 to provide that an HOA’s governing documents cannot prohibit a member or resident from exercising free speech by using social media or other online resources to discuss certain matters, even if the content is critical of the HOA or its governance. Such matters include development living, HOA elections, proposed legislation, government elections, and other issues of concern to members and residents of the community.  This does not mean an HOA has to provide any social media or other online resources to its members, and an HOA does not have to allow members to post content on the HOA’s website.  This new law seems to be fixing a problem that is not widespread, but has become an issue in some HOA communities.

Finally, AB 1410 prohibits an HOA from pursuing any enforcement actions for a violation of its governing documents during a declared state or local emergency if the nature of the emergency makes it unsafe or impossible for the owner to either prevent or fix the violation.  The only exception is an enforcement action relating to an owner’s nonpayment of assessments to the HOA.  This rule is clearly intended to give homeowners some leeway to comply with an HOA’s governing documents during government imposed emergency declarations.

 

Authored by Reuben, Junius & Rose, LLP Attorney Jay Drake.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

Inspection Requirements – Elevated Elements in CIDs

| Michael Corbett
inspection

Civil Code Section 5551, a statute within the Davis-Stirling Act and applicable to common interest developments with three (3) or more unit, obligates homeowners’ associations (“HOA”) to satisfy certain inspection requirements of all exterior elevated elements within a project that are more than six feet (6’) off the ground and supported in substantial part by wood or wood-based products. Examples of such exterior elements include balconies, decks, stairways and walkways.

These visual inspections – used to determine whether these elements are in a generally safe condition and performing in accordance with applicable standards – must be performed by a licensed structural engineer or architect, with the initial inspection being completed by January 1, 2025.[1] Thereafter, subsequent inspections must be undertaken and completed at least every nine (9) years.

Based upon the inspector’s visual inspections, further inspection, and construction and materials expertise, the inspector must then prepare and issue a written report containing the following information:

(1) The identification of the building components comprising the load-bearing components and associated waterproofing system.

(2) The current physical condition of the load-bearing components and associated waterproofing system, including whether the condition presents an immediate threat to the health and safety of the residents.

(3) The expected future performance and remaining useful life of the load-bearing components and associated waterproofing system.

(4) Recommendations for any necessary repair or replacement of the load-bearing components and associated waterproofing system.

Civ. Code. § 5551(e).

The inspector’s report must be stamped or signed by the inspector, presented to the board, and incorporated into the HOA’s reserve study as required by Civil Code Section 5550. Inspection reports must be maintained in the HOA’s records for two inspection cycles. Civ. Code § 5551(f), (i).

Partner Engineering and Science, Inc., will be holding a webinar to address these inspection requirements in more detail. Registration for this event may be completed here.

[1] Note: the inspection of applicable buildings for which a building permit application has been submitted on or after January 1, 2020, must occur no later than six (6) years following the issuance of a certificate of occupancy.

 

Authored by Reuben, Junius & Rose, LLP Attorney Michael Corbett.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

State Law Allows HOA Elections by Acclamation

| Jay Drake
board

The Davis-Stirling Common Interest Development Act (“Davis-Stirling Act”) is the primary body of law governing condominium projects and homeowners associations (“HOAs”) in California.  The Davis-Stirling Act generally provides for election of the HOA board of directors by secret ballot.  A change to the Davis-Stirling Act became effective in 2022 that authorizes the HOA board of directors to be elected by acclamation rather than through a typical balloting process.

Assembly Bill 502 allows for election of directors by acclamation for uncontested elections where there are the same number of candidates running for election as there are open director seats.  This means the HOA can save the considerable time and expense of the balloting process when the election is uncontested and all nominees will be elected anyway.  The following conditions contained in Civil Code Section 5103 must be satisfied for an election by acclamation to be available.

  1. The HOA must have held a regular election for directors in the last three years.
  1. The HOA must provide individual notice to the members of the election and procedures for nominating candidates at least 90 days before the deadline for submitting nominations. The notice must include the following:
  • The number of board positions that will be filled at the election;
  • The deadline for submitting nominations;
  • The manner in which nominations can be submitted; and
  • A statement informing members that if, at the close of the time period for making nominations, there are the same number or fewer qualified candidates as there are board positions to be filled, then the board of directors may, after voting to do so, seat the qualified candidates by acclamation without balloting.
  1. For a member who submits a nomination for a director position, the HOA must acknowledge receipt of the nomination within 7 business days. The HOA must also notify the nominee within 7 business days as to whether the nominee is qualified to be a candidate and, if not, the reason for the disqualification and the procedure to appeal the decision.
  1. The HOA must then provide a reminder notice of the election and procedures between 7 and 30 days before the deadline for submitting nominations. Such notice must contain the same information as the previous notice, and a list of the names of all of the qualified candidates to fill the board positions as of the date of the reminder notice.
  1. After the above has all been completed as required, the HOA board must then vote to consider the qualified candidates elected by acclamation at a meeting for which the posted agenda item includes the name of each qualified candidate that will be seated by acclamation if the item is approved.

These changes should be welcomed by many HOAs around the state.  Elections requiring a vote by secret ballot can be a significant procedural burden to HOA administration.  It is common for many associations, especially small associations, to maintain the same board members for multiple consecutive years. The changes referenced above will at least make it easier to reelect a standing board where no other owners have indicated an interest in joining the Board.

 

Authored by Reuben, Junius & Rose, LLP Attorney Jay Drake.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

HOA Liens Effective Even In Member Bankruptcy

| Michael Corbett
bankruptcy

This month, the California Second District Court of Appeal (“Court”) stopped short of prohibiting a common interest development owners association (“Association”) from recovering a portion of surplus proceeds following a nonjudicial foreclosure sale of an Association member’s townhome (“Unit”) where the Association had a recorded financial interest in the Unit.

In Cruz v. Valerio Townhomes Homeowners Association (an appeal from Los Angeles County Super. Ct. No. LS030053)[1], appellant and former Unit owner Cruz defaulted on her mortgage and the property was sold in a nonjudicial foreclosure sale. The sales proceeds exceeded the balance due on the loan, prompting the trustee to give notice of the surplus to all persons with a recorded interest in the Unit. Respondent Association filed a claim with the trustee for a portion of the surplus proceeds. Because Cruz disputed the Association’s claim, the trial court conducted a bench trial on the issue. The trial court entered judgment in favor of the Association and ordered the distribution of $94,873.97 to the Association and the remaining surplus of $20,639.98 to Cruz.

At the heart of this dispute was the validity and enforceability of a lien recorded against the Unit for unpaid assessments in late 2014. Cruz contended the Association’s claim was “full of over-billed dues and unearned and bogus fees” and not in compliance with the requirements of the Davis-Stirling Act (“Act”), the body of law governing residential common interest developments in California.

In 2015, the Association attempted to foreclose on the lien. However, a few days prior to the noticed foreclosure sale, Cruz filed a Chapter 13 bankruptcy petition, preventing the sale.

In the trial court’s tentative statement of decision, it ruled the Association had failed to establish a legally valid lien. Specifically, the Association failed to establish compliance with three (3) parts of the Act: (i) the pre-lien notice; (ii) the notice of recordation of the lien; and (iii) a legally binding vote by the Association board to record the lien. Accordingly, the trial court’s preliminary ruling held that the Association was not entitled to any surplus proceeds from the sale of the Unit.

The Association objected, requesting the trial court to recognize and consider relevant documents from Cruz’s bankruptcy case: the Association’s proof of claim for the lien and the Case Summary and Claims Register, which evidenced that Cruz failed to file an objection to the Association’s proof of claim.

The Association argued that Cruz’s failure to challenge the validity of the lien by objecting to the proof of claim in her bankruptcy case resulted in the claim being deemed allowed. The Association further contended that an allowed claim is in the nature of a final judgment and thus the principle of res judicata[2] precluded the trial court from considering the lien’s validity.

After further consideration of the Association’s argument, the trial court changed course, ruling that under res judicata, the Association’s unchallenged claim was tantamount to a final judgement. Consequently, the trial court determined it did not have the ability to reconsider the validity of the lien.

On appeal, Cruz attacked the Association’s arguments on dueling fronts: (i) the Association had waived any res judicata argument as to the validity of the lien because the Association presented independent evidence in support of the lien’s validity apart from its res judicata defense; and (ii) that collateral estoppel or issue preclusion (i.e., res judicata) did not apply in the subject case.

Both arguments put forth by Cruz were rejected by the Court, which affirmed the trial court ruling.

Waiver of Res Judicata

The Court disagreed with Cruz’s waiver position, pointing out, “waiver is the intentional relinquishment of a known right after knowledge of the facts. The burden … is on the party claiming a waiver of a right to prove it by clear and convincing evidence … and doubtful cases will be decided against a waiver. The waiver may be either express, based on the words of the waiving party, or implied, based on conduct indicating an intent to relinquish the right.” Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 31.

The Court continued, “California courts will find waiver when a party intentionally relinquishes a right or when that party’s acts are so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.” Waller, supra, at pp. 33–34. “The pivotal issue in a claim of waiver is the intention of the party who allegedly relinquished the known legal right.” DRG/Beverly Hills, Ltd. v. Chopstix Dim Sum Cafe & Takeout III, Ltd. (1994) 30 Cal.App.4th 54, 60.

Inapplicability of Res Judicata

The Court – correctly – began its analysis by recognizing that even where all three (3) required elements of res judicata (as described in footnote 2) have been satisfied, the Court has repeatedly looked to the public policies underlying the doctrine before concluding whether res judicata should be applied in a particular setting. Lucido v. Superior Court (1990) 51 Cal.3d 335, 342–343.

Homing in on the relevant federal bankruptcy statute, the Court cited title 11 of United States Code section 502, subdivision (a), which states a “claim or interest, proof of which is filed under section 501 of this title …, is deemed allowed, unless a party in interest … objects.” (Emphasis added) Further, the allowance or disallowance of “a claim in bankruptcy is binding and conclusive on all parties or their privies, and being in the nature of a final judgment, furnishes a basis for a plea of res judicata.” Siegel v. Fed. Home Loan Mortg. Corp. (1998) 143 F.3d 525, 529. Put simply, California courts must give full faith and credit to a final order or judgment of a federal court. Levy v. Cohen (1977) 19 Cal.3d 165, 172.

Conclusion

Because Cruz did not object in bankruptcy court to the Association’s proof of claim concerning the subject lien, the claim was deemed allowed. 11 U.S.C. § 502(a). Even if a bankruptcy case were later dismissed – as was the case in Cruz – the result would be the same. As the Court noted, the validity of the subject lien was established when the Association filed a proof of claim in Cruz’s bankruptcy case and Cruz failed to object. 11 U.S.C. § 502(a); Siegel, supra, at p. 529.

Owners’ associations throughout California should therefore not be deterred from enforcing lien rights against a delinquent member who has declared bankruptcy, and would be wise to promptly lodge a proof of claim at the outset of such proceedings to protect its financial interests against delinquent members.

[1] While Cruz is an unpublished opinion, it gives valuable insight on how future courts might deal with similar issues.

[2] The doctrine of res judicata gives certain conclusive effect to a former judgment in subsequent litigation involving the same controversy. The required elements for applying this doctrine to either an entire cause of action or one or more issues are the same: (i) a claim or issue raised in the present action is identical to a claim or issue litigated in a prior proceeding; (ii) the prior proceeding resulted in a final judgment on the merits; and (iii) the party against whom the doctrine is being asserted was a party or in privity with a party to the prior proceeding. People v. Barragan (2004) 32 Cal.4th 236, 252–253; Boeken v. Philip Morris USA, Inc. (2010) 48 Cal.4th 788, 797.

 

Authored by Reuben, Junius & Rose, LLP Attorney Michael Corbett.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

Summary of New State Condo Laws

| Jay Drake
laws

The California state legislature recently passed a number of new laws pertaining to California common interest developments and homeowners associations.  Below is a brief summary of a few of the new laws.

SB 432 – This is a follow-up to our Update on July 9, 2021, which described proposed SB 432.  This bill has now been approved and will become effective January 1, 2022.  The law makes several changes to HOA election procedures, including HOA director qualifications and term limits, retention of election materials and election notice requirements.

AB 1101 – This bill was approved on September 23, 2021, and makes changes aimed at preventing fraud and financial malfeasance in HOAs, and furthers the changes made by AB 2912 in 2018 which implemented basic protections for HOA finances.  This bill requires (i) HOAs’ accounts to be in financial institutions insured by the FDIC, National Credit Union Administration Insurance Fund, or a guaranty corporation, (ii) imposes requirements on HOAs to obtain fidelity bond insurance covering acts by HOA directors, officers and managing agents, (iii) requires written HOA board approval for withdrawals of specified large amounts from HOA accounts, and (iv) prohibits HOA managing agents from comingling funds of the HOA with the managing agent’s own funds.

AB 1584 – This is a follow-up to our Update on March 11, 2021 regarding AB 3182 which added new Civil Code 4741 that limits rental restrictions in condo projects.  That bill required HOAs to amend their governing documents to comply with Civil Code 4741 by December 31, 2021.  AB 1584, approved on September 28, 2021, modifies Civil Code 4741 by (i) allowing the HOA board of directors to unilaterally amend the HOA’s governing documents to comply with Civil Code 4741, without the approval of the HOA members, and (ii) gives the board of directors until July 1, 2022, to complete such amendment.

 

Authored by Reuben, Junius & Rose, LLP Attorney Jay Drake.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

Condo Owners Exempt from HOA Rental Prohibitions Adopted After Purchase, Court Rules

| Michael Corbett
rental

The 4th District Court of Appeals has resolved an ambiguity in the intent and enforceability of Civil Code Section 4740, a statute within the Davis-Stirling Act (“Act”) placing limitations on rental prohibitions within common interest developments (“CID”) in California. The court’s ruling is a victory for owners of residential condominiums currently renting units in a manner that their homeowners association (“HOA”) seeks to prohibit through proposed changes to the CC&Rs, bylaws, rules, or related documents (collectively, the “Governing Documents”) of the HOA.

In Brown v. Montage at Mission Hills, Inc. (21 C.D.O.S. 8590), certified for publication on August 20, 2021, the court held that, pursuant to Section 4740(a), an HOA’s amendment to its Governing Documents prohibiting short-term rentals of less than 30 days (“STRs”) was unenforceable against an owner that had been using her unit for STRs the previous 16 years.

Civil Code section 4740(a) states that an owner of a property in a CID shall not be subject to a provision in its regulations “that prohibits the rental or leasing of any of the separate interests in that common interest development” un­less that provision “was effective prior to the date the owner acquired title to their separate interest.”

The trial court agreed with the HOA that Section 4740 precluded CIDs from imposing complete bans on renting, and that its prohibition on STRs was merely a restriction on rent­ing. The Court of Appeal reversed that ruling, finding the meaning of section 4740 to be unclear, ambiguous, and in need of closer scrutiny.

The ambiguity lied in two reasonable, but conflicting, interpretations of the statute’s meaning: on the one hand, if a regulation forbids a specific category of rentals, such as STRs, that regulation “prohibits” that type of rental, even if it does not prohibit all forms of rentals; on the other hand, Section 4740(a) could be read to forbid only outright “prohibitions” on leasing, but not “restrictions” on leasing that fall short of a complete ban on all leasing.

To resolve these conflicting interpretations, the court considered both the legislative history of Section 4740, as well as other provisions within the Act’s statutory scheme that imposed restrictions and/or prohibitions of certain actions or conduct.

While the court acknowledged that some statutes within the Act expressly created distinctions between “restrictions” and “prohibitions”, it also found that the legislative history of section 4740 indicated that the Legislature intended broad protection for owners against restrictions on renting, includ­ing restrictions against STRs. Further, the legislative history indicated that the Legisla­ture’s intention was to ensure that unit owners within CIDs maintained all of the rental rights they had at the time they purchased their unit.

In seeking guidance from both the entire statutory scheme of the Act and the legislative intent behind Section 4740, the court was required to “choose the construction that comports most closely with the Legislature’s apparent intent.” (Smith v. Superior Court (2006) 39 Cal.4th 77, 88) With this directive, the court determined the goal of Section 4740 is to exempt CID unit owners from any kind of rental prohibition or restric­tion that did not exist when the owner acquired title to the unit.

Notably, the court cited the opinion of the Legislative Counsel regarding section 4740’s effect on rental prohibitions in CIDs, including prohibitions against STRs, at the time of the statute’s enactment in 2012. The Legislative Counsel opined that a unit owner within a CID is subject to a provision of, or amendment to, Governing Documents that prohibits an owner from renting out their unit only if either (1) the prohibition took effect before the owner acquired title to his or her separate interest in that CID, or (2) the owner consented to the Governing Documents or amendment con­taining that provision.

In Brown, HOA respondent Montage nonetheless argued its STR prohibition was permissible due to “public policy considerations.” Montage observed that individual property owner’s rights must some­times give way to the public interest and the right of CIDs to decide their rules and restrictions. However, relying on the public policy considerations given priority by the Legislature when it adopted Section 4740, the court found the statute to have been enacted to protect “the rights of CID own­ers to rent or lease their properties, as the rights existed at the time they acquired them,” and that its goal was to ensure that “the right of an owner to rent or lease his or her separate interest [in a CID] shall be the same as when the owner purchased his or her separate interest throughout the life of ownership.” (Sen. Com. on Judiciary, Analysis of Sen. Bill No. 150 (2011-2012 Reg. Sess.) as amended Apr. 25, 2011.) (Italics added.)

In other words, a residential condominium owner will not be subject to amendments to Governing Documents prohibiting a specific form of leasing – including without limitation STRs – otherwise allowed at the time such owner first purchased their unit. An owner who acquired title prior to the HOA’s adoption of such a rental prohibition would be exempt from the same unless the owner waived this right by formally voting in favor of the proposed prohibition.

The Brown appeal was pending while the Legislature enacted Civil Code Section 4741, a statute that was the subject of an e-update by this firm earlier in the year.  Section 4741 allows an HOA to adopt and enforce a provision in its Governing Documents that prohibits transient or STRs of units within its CID for a period of 30 days or less. (Civ. Code, § 4741, subd. (c)). However, as pointed out by the Brown ruling, Section 4741 expressly provides that, in ac­cordance with Section 4740, Section 4741 does not change the right of an owner of a separate interest who acquired title to their separate interest before the effective date of this section to rent or lease their property. (Civ. Code, § 4741, subd. (h)).

 

Authored by Reuben, Junius & Rose, LLP Attorney Michael Corbett.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

Proposed State Law Allows Term Limits for HOA Board of Directors

| Jay Drake
HOA

A homeowners association (“HOA”) is required to hold elections for its board of directors (“Board”) when a seat becomes available.  The Davis-Stirling Act specifies that HOA elections must conform to certain rules and procedures.  A Board can set qualifications for nominees running for the Board, but there are only a narrow set of reasons why a Board can disqualify a person from serving on the Board.  Reasons for disqualification include failure to pay HOA assessments, circumstances where a member of the individual’s household would be serving concurrently on the Board, and, in certain situations, the individual’s past criminal convictions.

Senate Bill 432 currently processing through the California State legislature, if enacted, would add another factor that would disqualify an HOA member from running for the Board:  if an individual has served the maximum number of terms or sequential terms permitted by the HOA.  An HOA is not required to impose term limits for the Board, but if the HOA has term limits, it can enforce them and disqualify a person from running for an additional term.

Senate Bill 432 would also make other technical changes to HOA election rules, including requirements for inspectors of elections, Board candidate requirements, requiring an HOA to maintain election materials for one year after the election, and noticing requirements.

We will follow Senate Bill 432 as it works its way through the State legislature and provide another update if it is finally passed and enacted.

 

Authored by Reuben, Junius & Rose, LLP Attorney Jay Drake.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

No Parking? No Problem. Property Owner Not Liable for Failure to Provide On-Site Parking

| Lindsay Petrone
on-site

A case recently discussed a property owner’s duty to a third party visitor, more specifically a possible duty to a third party who incurs an off-property injury due to an alleged deficiency at the owner’s property itself.  In Issakhani v. Shadow Glen Homeowners Association, Inc. (“HOA”), the plaintiff tried to park at the property (owned by the HOA) but there was no more guest parking available (and likely too few guest parking spaces to begin with at the property), so she parked across the busy street at an off-site location.  63 Cal.App.5th 917 (2021).  Plaintiff jaywalked to cross the street to get to the property and was hit by a car and suffered severe injuries.  The Court of Appeal ultimately held that the property owner did not have a duty of care to protect the plaintiff from an accident that occurred as she travelled to the premises.

The Court analyzed the standards for negligence and duty of care.  Claims for negligence or premises liability for injury at a property rely on the same analysis – was there a duty of care?  Was there a breach of that duty?  If yes to the first two, was such breach the cause of the person’s injuries?  The Court referenced the common law that a property owner does have a duty to maintain the land in its possession and control in a reasonably safe condition as to avoid exposing others to an unreasonable risk of injury.  The Court elaborated that such duty of care can extend to a responsibility to avoid exposing persons to risks of injury that occurs off-site if the landowner’s property is maintained in such a manner as to expose persons to an unreasonable risk of injury off-site.

Here, the Court did state that a landowner has a duty of care not to maintain conditions on its property that exacerbated the dangers of invitees entering or exiting the property.  However, they rejected the theory that the absence of adequate on-site parking, by itself, amounted to a condition on the property that exacerbates the off-site danger to invitees and gives rise to an actionable duty.  They found that although there was a foreseeability of harm to the plaintiff with reasonable degree of certainty due to lack of sufficient parking and possible injury when coming to the property, there was not a closeness of connection between the defendant’s conduct and the injury suffered.  More specifically, they found that the plaintiff’s actions – selecting an off-site parking location on the far side of a busy street and then jaywalking – was more a product of plaintiff’s decisions rather than simply a lack of on-site parking at the HOA’s property.

In addition to the analysis of common law elements, the Court also relied on a prior case which directly held that a landowner does not have a duty to provide invitees with on-site parking in order to protect from the dangers of crossing nearby streets to get to the property.  Finally, they found that public policy guarded against finding for the plaintiff as a property owner is sometimes limited by a finite amount of parking and cannot necessarily always provide enough on-site parking for guests and invitees.

Issakhani reminds us that a landowner should be cognizant of possible unsafe conditions at their property which could expose them to liability.  The Court will analyze whether there was a duty and foreseeability of harm to the third party based on the maintenance of one’s own property and a close connection between the risk and injury suffered.  This could also include liability for injuries off the property if directly caused by an unreasonable risk at one’s own property.  However, this case highlights that one cannot cover each and every contingency and someone’s choice to make a riskier decision (here jaywalking across a busy street) will likely not be held against the property owner.

 

Authored by Reuben, Junius & Rose, LLP Attorney Lindsay Petrone.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.