Condo Court

Facts Of The Case. Certain homes within the Marquesa at Monarch Beach Homeowners Association had beautiful ocean and/or golf course views for which the owners had paid a premium. Over time, some of these ocean/golf course views became blocked by palm trees which had been planted on neighboring lots, and which were allowed to grow far above the height of the adjacent houses.

CC&R section 7.18 required that “all trees” must be “trimmed” by their Owner so that the trees “shall not exceed the height of the house on the Lot”. However, that section also stated that any tree which the Architectural Committee determined did not obstruct the view from any of the other Lot did not have to be trimmed.

Since trimming the top off a palm tree would effectively kill it, the board enacted rule excluded palm trees from CC&R section 7.18’s trimming requirements. Another board rule narrowly defined the views which were entitled to protection under section 7.18, thereby allowing many of the palm trees to remain.

After several homeowners complained that certain palm trees were obstructing their views, the board determined that under all of the circumstances, it would be unreasonable to require that the palm trees be trimmed or removed.

The complaining homeowners proceeded to sue the Association for failing to fully enforce CC&R section 7.18. The Association argued that the board’s decisions allowing the palm trees to remain and adopting the narrow view rule must be upheld because these decisions were protected by the judicial deference/business judgment doctrine.

The Court’s Decision. The court of appeal ruled in favor of the homeowners in the unpublished case of Ekstrom v Marquesa at Monarch Beach HOA (November 3, 2008), and ordered the Association to enforce CC&R section 7.18 as to the view obstructing palm trees.

The Court’s Reasoning. The court found that section 7.18 was not ambiguous since it expressly applied to all trees: “Nothing in the CC & Rs permits the Association to simply exclude an entire species of trees from section 7.18’s application simply because it prefers the aesthetic benefit of those trees to the community….The Board’s interpretation of the CC & Rs was inconsistent with the plain meaning of the document and thus not entitled to judicial deference.”

Furthermore, since the board’s rule narrowly defining a view also was in direct conflict with the clear language in CC&R section 7.18, that rule was unenforceable. As the court noted, “[e]ven if the Board had some discretionary authority to define what was meant by view, it was not free to fashion a definition that rendered section 7.18 meaningless.”

Comment. Boards should be careful not to make decisions or enforce rules which are directly inconsistent with express enforceable provisions of the CC&Rs. Such board actions are subject to challenge in the courts, and may not be protected by the business judgment/judicial deference doctrine.

The Facts of the Case. An employer, Aramark Facility Services, received letters from Social Security stating that the social security numbers of certain employees did not match the Social Security Administration’s database.  Aramark advised the affected employees about the no-match letters, and gave them three days to bring in either a new social security card or verification that a new card was being processed. If that deadline was not met, the employees were told that their employment would be terminated. Thirty-three employees failed to timely comply and were fired.

After a labor arbitrator held that the employer did not have cause to fire the workers, a federal district court rejected the arbitrator’s ruling. The case was then appealed to the Ninth Circuit Court of Appeals for a decision.

The Issue: Did the employer properly discharge its employees based on the receipt of no-match letters and the employees subsequent failure to bring in clarifying information about their social security numbers?

The Court’s Decision. In Aramark Facility Services v. Service Employees Int. Union Local 1877, 530 F.3d 817 (2008), the Ninth Circuit ruled in favor of the employees and ordered each of them reinstated with back pay.

The Court’s Reasoning. The court noted that federal law subjects employers to civil and criminal penalties if they employ an undocumented worker “knowing” or having “constructive knowledge” of the employee’s undocumented status.

Nevertheless, the Ninth Circuit explained that an employer’s mere receipt of a no-match letter “does not automatically mean that an employee is undocumented or lacks proper work authorization” because such mismatches “could generate a no-match letter for many reasons, including typographical errors, name changes, compound last names prevalent in immigrant communities, and inaccurate or incomplete employer records.” Rather, a no-match letter “merely indicate[s] that the worker’s earnings were not being properly credited” and does not contain “positive information” of the worker’s undocumented status.

The court also criticized the employer’s decision to give the employees an extremely short three-day window to clear up the Social Security issues, which made it likely that many of the employees simply stopped trying to comply with the deadline because they realized it could not be met.

Since the employer did not have sufficient constructive knowledge to establish that the employees were undocumented, the court decided that the terminations were improper. All the fired employees were reinstated to their jobs with full back pay, even though the justices acknowledged that “it seems reasonable to suspect that some of the fired workers were undocumented…”

Comments. This case illustrates the difficult position Associations are in when they receive “no-match” letters from the Social Security Administration about their employees. Aramark makes it clear that employers may not automatically assume that any employee is an undocumented worker based solely upon the receipt of a “no-match” letter. Rather, additional corroborating evidence is necessary. Furthermore, employees should be given a reasonable period of time (three days is definitely too short) to resolve the discrepancies raised by a no-match letter.  Because of the many gray areas and potential liability for wrongful termination, Associations should consult with their legal counsel upon receipt of a no-match letter to determine the appropriate course of action to take.

The Condo Building. A high rise apartment building (the Churchill) was constructed in 1962 and was converted to condominiums in 1976.  The original construction contained an unknown defect: holes in the concrete slabs between each floor had not been fire proofed, as required by the original architectural plans and the city building permit. Since this defect was not known at the time of construction, a Certificate of Occupancy for the building was issued. Furthermore, no order to change or upgrade these slab penetrations has ever been issued as existing building codes allow such unfilled floor penetrations to remain as existing, non-conforming conditions until a unit is remodeled, at which time the remodeling unit owner must fill any exposed floor penetrations.

The Smoke Odors. The Ritters purchased one unit within the building in 1995. In 1998, they began complaining to the Association about cigarette smoke odors within their unit. In 1999, the Ritters purchased (and then remodeled) the adjoining unit, and soon discovered that this second unit had the same odor problem.

In 2003, both the Ritters and the Association hired separate experts to determine the cause of these odors, and both experts came to the same conclusion:  The cigarette smell was caused by smoke coming from the units below through unfilled slab penetrations which were present throughout the entire building, and these penetrations posed a significant fire safety risk.

The Board Hearing. The board held a hearing, during which the Ritters were represented by counsel. After considering the evidence presented, the Association’s expert report, and the advice of counsel, the board found that: 1) the Ritters’ 1999 remodel triggered their obligation to fill the floor penetrations adjacent to their units (at a cost of approximately $2,700 per unit); 2) the Association did not have a legal obligation to file the holes because they were “existing, non-conforming” conditions; 3) The Association would not at this time undertake the expense of making the corrections; and 4) The Ritters were ordered to pay $200 per day in fines to the Association if they failed to comply within 30 days.

The Ritters refused to comply with this board order, and proceeded to file a lawsuit against the Association and each of the directors individually, seeking damages of at least $200,000 for diminution in the value of their units, as well as an injunction requiring the Association to fill all slab penetrations throughout the building.

The Decision in the Trial Court. The trial court entered a judgment in favor of the individual directors, but against the Association in the amount of $4,620. That amount was further reduced by 25% due to the Ritter’s negligence. The trial judge ordered the Association to fire stop the slab penetrations adjacent to the Ritters’ two units, but denied the Ritters’ request that the Association fill all slab penetrations throughout the building. Instead, the court ordered the Association to conduct a membership election to determine whether a special assessment should be imposed to fire stop all slab penetrations in the building. At that election the membership voted against the special assessment.  Finally, the trial court ordered the Association to pay the Ritters’ attorneys fees and costs in the amount of $531,159. And, even though the individual directors prevailed on all the claims against them, the court refused to award attorneys fees against the Ritters.

The Decision in the Appellate Court. In Ritter & Ritter v The Churchill Condominium Association (2008), Court of Appeal affirmed the trial court’s judgment.

With respect to the individual directors, the court explained that “the rule of judicial deference set forth in the [Supreme Court’s] Lamden case provided protection from personal liability for the individual directors of a non-profit homeowners association.” Therefore, the individual directors were “shielded from personal liability” for the consequences of their good faith decision making.

However, the Court of Appeal found that Lamden rule did not similarly protect the Association in this particular case because “it does not follow and is not true that the same rule of judicial deference will automatically provide cover” to the association itself. Rather, a member of the association can recover damages from the association which result from a dangerous condition negligently maintained by the association in the common area.

The Dissenting Opinion. There was a strong dissenting opinion, which would have denied attorney’s fees to the Ritters and awarded attorneys fees to the prevailing individual directors. The dissenting opinion stated:

The Ritters asked for much at trial, but obtained little. They sued both The Churchill and the directors, alleging damages of $200,000 for the diminished value of their units while seeking an injunction requiring the defendants to spend potentially hundreds of thousands more to repair the slab penetrations in not just their unit but in every condominium in the complex. All they got was their own unit repaired at a cost of a few thousand dollars, a vote of the other unit owners refusing to fund the repairs of the other units, and relief from the fines imposed by the Churchill for failing to make their own repairs.  All five directors were exonerated of liability while the Ritters were found to be 25% at fault for the events leading to this action….Given these obviously mixed results, I believe the trial court abused its discretion and should have determined there were no prevailing parties on the Ritters’ complaint.

Comments. The portion of this case which holds that the Supreme Court’s 1999 Lamden v LaJolla Shores Clubdominium Homeowners Assn. decision did not apply to and protect the association from liability is questionable. This is because Lamden was itself a case against an association, and the Supreme Court’s holding seems to signal its intent that associations should not be held liable in these types of cases. As the Lamden Court stated:

Where a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant statutes, covenants and restrictions to select among means for discharging an obligation to maintain and repair a development’s common areas, courts should defer to the board’s authority and presumed expertise. Thus, we adopt today for California courts a rule of judicial deference to community association board decision making that applies, regardless of an association’s corporate status, when owners in common interest developments seek to litigate ordinary maintenance decisions entrusted to the discretion of their associations’ boards of directors.

It’s that time of the year again. No, I don’t mean Halloween — (although the State legislature sometimes does do some scary things!) It’s that time when we find out what new laws our California State representatives will impose upon all of us beginning next year.  The Governor has signed four bills directly relating to common interest developments, all of which will become effective on January 1, 2009. Here is a summary of these key new laws:

Laws Which Encourage Solar Energy. Two of the new laws seek to encourage the use of solar energy.

The first solar related law states that any governing document provision which “effectively prohibits or restricts” the installation or use of a solar energy system is void and unenforceable.  Associations can, however, impose reasonable restrictions on such systems. But, if an Association willfully violates this law, it must pay damages to the injured member, up to $1000 in penalties, and reimburse the member for their attorney’s fees. (Civil Code section 714)

The second solar energy law requires that any approval or denial of a solar energy system application be in writing. Furthermore, an application shall be deemed approved unless the association has denied it in writing within 60 days after receipt, unless the delay is the result of a reasonable request for additional information. (Civil Code section 714)

Disputes Between an Owner and the Association. This addition to the Davis-Stirling Act applies to any dispute within the jurisdiction of small claims court between an owner and the Association regarding “any disputed charge or sum levied by the association, including, but not limited to, an assessment, fine, penalty, late fee, collection cost, or monetary penalty imposed as a disciplinary measure.” In such a circumstance, the owner may pay “under protest” the entire amount the Association claims is owed, and then file an action in small claims court to recover the amounts paid. (Civil Code section 1367.6)

Notice to Association of Trustee’s Deeds. Under this new law, an Association may record a formal request that any mortgagee, trustee, or other person who is authorized to record a notice of default, mail to the association a copy of any trustee’s deed upon sale. If such a request is recorded, then the mortgagee or trustee is required to mail that information to the Association within 15 business days following the date the trustee’s deed is actually recorded. (Civil Code section 2924b)

Bills Vetoed By Governor. The Governor vetoed the following bills, all of which are quite controversial — and most (if not all) of which certainly will be introduced again next year:

       A bill which would compel Associations to provide payment plans to delinquent owners (AB 952);

       A bill which would restrict an Association’s right to impose rental restrictions (AB 2259);

       A bill which would require board member education (AB 2806);

       A bill which would establish a Common Interest Development Bureau as a part of the Department of Consumer Affairs (AB 567);  and

       A bill which would impose strict disclosure deadlines for the seller of any unit in a common interest development (SB 127).

Additionally, A bill which would revise, renumber and consolidate entire Davis-Stirling Act was withdrawn by the Legislature, and will be re-introduced next year (AB 1921).

Comments. The bills which the Governor signed are quite a bit less controversial than the ones which he vetoed. I expect that during the 2009 session, the proponents of these vetoed bills will try again to get them passed by the legislature and signed by the Governor. I will keep you informed throughout next year as the new Association-related bills wind their way through the halls of Sacramento….

Facts: An Association’s Board of Directors submitted a CC&R amendment to a vote of the members containing the following two rental restrictions: 1) Owners could not lease their units for less than 30 days; and 2) the Association could evict a tenant who was in breach of the governing documents. The amendments did not receive the required 67 percent affirmative votes (only 59% of the owners voted yes), so the Association filed a Superior Court petition seeking approval of the amendments.

One homeowner objected to the petition, arguing that the amendments were not reasonable and the Association violated Civil Code section 1363.03(g) by failing to publicize the results of the election in a communication directed to all members.

Issues: Were the two rental restrictions reasonable? Should the Association’s failure to strictly comply with section 1363.03(g) result in the denial of their petition seeking approval of the amendments?

Rulings of the Court: In Mission Shores Association v. Pheil, (September 5, 2008), the California Court of Appeal ruled in favor of the Association, holding that the two rental restrictions were reasonable, and the Association’s failure to strictly comply with section 1363.03(g) was too trivial to warrant denying the petition.

Reasoning of the Court. The court explained that the 30 day minimum lease term requirement was reasonable because the provision applied to all owners, did not violate public policy, and any enforcement burden was outweighed by the amendment’s “beneficial value in preserving the residential character of the development.”

Furthermore, the eviction provision was reasonable because tenants should be bound by the CC&Rs to the same extent as owners, and if an owner refuses to take effective measures to assure his or her tenant complies with the CC&Rs, the Association needs a means of assuring such compliance. Significantly, however, the court explicitly cautioned that Associations should carefully “consider the risks involved” before actually evicting a tenant because “an association may be liable for wrongful eviction given the fact that the association does not have possession of the property, and thus, is not the rightful party to bring the action.”

Finally, the court ruled that the Association’s failure to strictly comply with the notice requirements in section 1363.03(g) was excusable because the election results were reported to Association members at the board meeting immediately after the ballots were counted, and were recorded in the board meeting minutes which were available to all members. Therefore, the Association’s failure to give the additional notice required by section 1363.03(g) was “trivial” and would not preclude approval of the Association’s petition.

Comments: The Mission Shores case is important because it shows that reasonable rental restrictions in the governing documents are enforceable, and affirmed the right of Associations to take appropriate actions against tenants who violate the governing documents. However, Associations should not read Mission Shores as a green light to begin evicting errant tenants from their homes, as there is substantial liability exposure to Associations for wrongful eviction. There are other effective (and less risky) methods for dealing with problem tenants, and Boards should contact legal counsel for advice on the best way to handle each particular situation.

FACTS. An Association’s architectural review committee (ARC) denied Mr. and Ms. Fox’s application to expand their deck because it would impair their neighbor’s ocean view. The Foxes sued the association, arguing that their application should have been approved since the neighbor did not have any right to keep her existing view.

DECISION OF THE COURT. In the July 16, 2008 unpublished opinion of Fox v. Corniche Sur Mer Homeowners Assn., the California Court of Appeals ruled in favor of the Association.

REASONING OF THE COURT. The court reasoned that:

“[I]t was well within the discretion of the ARC to consider the impact of the improvement on existing ocean views. California law specifically authorizes common interest developments to grant an architectural review committee broad, subjective discretion to reject proposed improvements on aesthetic, artistic, or similar grounds.”

Additionally, the court found that the Association’s failure to list all of its reasons for denying the application in its notification letter to the applicant did not violate Civil Code section 1378(a)(4). This statute requires, among other things, that the association issue a written decision on each architectural application, which must include an explanation of why a proposed change is disapproved. As the court explained:

“[T]here is nothing in either the statute or… the CC&Rs requiring a statement of every factor or reason for denying the project. And while it would be problematic if the board gave constantly shifting reasons, there is no evidence that is the case here. Stating some but not all of the reasons for denial does not render the denial ineffective. As we have discussed, denial of the application because of the new deck’s impact on existing ocean views was within the ARC’s discretion. That it had other reasons cannot be used to negate its decision.”

RECOMMENDATIONS. Make sure that your governing documents expressly set forth whether (and to what extent) existing views are to be protected. Similarly, your Association’s governing documents should be checked to make sure that they clearly give the architectural committee the appropriate amount of discretion to consider (or to exclude from consideration) aesthetic and artistic grounds in connection with decisions on architectural applications. Finally, all decisions on proposed architectural changes must be documented in a writing which describes why the proposed change is disapproved and otherwise fully complies with Civil Code section 1378.

Facts of the Case. An association retained an outside vendor to provide security services. The security company assigned one of its guards to work at the association. The security company subsequently fired the guard – who then proceeded to sue the association, its president and an association employee for discrimination, harassment, retaliation and wrongful discharge. Did the guard prevail on these claims?

Ruling of the Court. The court ruled against the guard in the unpublished 2007 California Court of Appeals case of Thompson v. Oceanaire Homeowners Association, 2007 WL 1898511.

The guard, Wayman Thompson, was hired and fired by his actual employer, the security company. Therefore, in order to prevail on his claims against the association, Thompson was required to establish that the association was his “special employer.” The court held that Thompson did not meet this burden because the association did not exercise sufficient control over him or his job duties, did not train him or provide him with any job-related equipment, and the association’s property manager did not have the power to terminate his employment.

Acknowledging the right of community associations to oversee third party vendors who perform work on association property, the court concluded that an association:

“must be permitted to monitor the performance of the employees of service providers with which [it] contracts, and…must be able to do so without thereby becoming the special employer of those employees.”

Analysis. An association may, in some situations, be treated as the special employer of a vendor’s employee. This determination is a factual one, based in a large part upon who has the right of control over the employee’s activities. The more control an association retains over a vendor’s employees, the more likely a court will find the association to be a special employer – with all of the additional liability exposure which results from that designation. This is another good reason for boards and managers to periodically check with their insurance agents to make sure that the association is appropriately insured.

What are an association’s responsibilities to residents after a crime is committed in the common area? Can the association and its manager be held liable to a resident who is the victim of a subsequent common area assault? Could a manager who did not know about prior criminal acts nevertheless be held liable for telling a prospective resident that the complex is safe and there is no crime in the area?

Facts of the Case: Yu Tan was shot in the neck (rendering him a quadriplegic) during an attempted carjacking which occurred within the ungated portion of his apartment complex’s common area parking lot. During the two years immediately prior to the attack on Mr. Tan, there had been three similar violent attacks in the ungated parts of the common area.

Moreover, when deciding whether to move into the complex, Mr. Tan relied upon the apartment complex’s leasing agent’s statement to him that the property was safe and there was no crime in the area. At the time the agent made these statements, he had not made any effort to educate himself about criminal activity in the area.

Mr. Tan sued the property management company and the owners of the apartment complex, claiming that they were liable for his injuries.

Ruling of the Court: In Tan v. Arnel Management Co., 2008 DJDAR 6242 (April 2008), the California Court of Appeals ruled in favor of Mr. Tan.

The three prior similar assaults put the property complex owners and management company on notice that there was a risk of violent criminal assaults on the common area. Consequently, the court found that the complex owners and management company had a legal duty to provide “relatively minimal” additional security measures — such as installing a gate at the entrance into the common area parking lot and closing a small gap in the fencing around the entire complex – neither of which would have required the expenditure of significant funds. The court concluded that their failure to do so exposed both the management company and the complex owner to liability for the attack.

The court also held that the statements to Mr. Tan that the property “was safe” and there was “no crime in the area” were misrepresentations. Although the agent of the complex did not have any actual knowledge about the prior criminal activities, he should have known about the three prior assaults and other property related crimes which had recently been committed at the complex. Therefore, both the management company and the complex owner were found to be liable for these misrepresentations by their representative.

Recommendations: Liability for criminal acts on common areas is a very important concern for associations and their managers. Since both community associations and apartment complexes have common areas which are controlled by the association or landlord, courts frequently rely on apartment cases when deciding issues involving the association’s common area duties. Therefore, the Tan case should be carefully reviewed by all associations and their managers. If there have been criminal acts within an association, appropriate investigation and remedial action should be taken after consultation and advice from the association’s legal counsel.

Facts of the Case. For fifteen years, several fourth floor unit owners at The Landing HOA had been using (without HOA approval) the common area attic spaces next to each of their units for storage. Each of these attic spaces was only accessible to the adjacent unit. After one owner complained, the board of directors conducted an investigation.

The board eventually decided that, based upon their interpretation of the CC&Rs and the results of their investigation, it would grant each owner a license to use 120 square feet of their adjacent common area attic space for storage, provided that the owner signed a permission form and obtained insurance.

Additionally, the directors amended the Association rules to specifically allow the fourth floor owners to use their adjacent attic spaces, conducted an election wherein the membership overwhelmingly approved the rule change, and passed a resolution transferring to fourth floor owners the exclusive right to use the common area attic spaces.

The complaining owner believed that the board had improperly given away part of the Association’s common area to individual owners, and sued the association.

Question for the Court. The court was asked to decide whether the board properly allowed the fourth floor homeowners to exclusively use the common area attic spaces next to their units.

Decision of the Court. In the case of Harvey v. The Landing Homeowners Association, 2008 WL 903096 (2008), the court ruled in favor of the Association.

The court found that the Association’s CC&Rs did not require that the board act in a specific way. Instead, the governing documents gave the board the discretion to decide whether the fourth floor owners could use the adjacent common areas for storage. Therefore, the court’s responsibility was to defer to the Board’s “authority and presumed expertise regarding its sole and exclusive right to maintain, control and manage the common areas.”

In this case, the board properly made a discretionary “economic decision” to allow the fourth floor owners to use the common area attic spaces, after conducting a “reasonable investigation” and making its decision “in good faith, and with regard for the best interests of the community association and its members”.

Recommendations. When confronted with an issue involving the interpretation of a particular governing document provision, it is very important to distinguish between mandatory and discretionary provisions. Some provisions are mandatory: These must be strictly followed by the board (unless unenforceable for some other reason, such as violation of law or public policy). However, other sections give the board wide discretion as to how it can act and what decisions it can make. If the applicable provision is discretionary, then before making a decision, the board should conduct a reasonable investigation, act in good faith, and base their decision upon what is the best interest of the association as a whole.

Facts of the Case. An association’s architectural committee approved, with certain conditions, an owners’ plans to remodel and expand their home. The owners subsequently decided to move the location of the garage, and submitted modified plans to the committee.

The committee denied approval of the modified plans. The owners agreed to correct the committee’s objections to the new garage, while noting that they would begin construction only on those areas unrelated to the garage based upon the originally approved plans.

After construction began, the association ordered the owners to immediately stop all work. The association claimed that its original approval was not final since all of the stated conditions had never been met. Therefore, according to the association, the owners had no right to begin construction.

Questions for the Court to Decide. Was the architectural committee’s “conditional approval” of the owners’ original plans final and binding? Did the association have the right to stop the owners from beginning their construction?

Ruling of the  Court. In the unpublished California Court of Appeal case of Brutocao v The Hunt Club Community Association (decided February 29, 2008), the court ruled that the committee’s conditional approval of the original plans was final and binding, and therefore the association had improperly stopped the owners from beginning construction.

The court explained that even though the committee’s original approval contained conditions, it was nevertheless final and binding because the committee did not specifically state that any of the listed conditions had to be performed before the owners could begin construction. Thus, the owners could comply with the conditions after they began construction, and the association’s order to stop work was improper.

Furthermore, the court noted that the association’s governing documents did not provide for the automatic invalidation of approved plans which were subsequently modified by an owner.

Large Damages Awarded. The trial court ordered the association to pay the owners’ increased construction costs in the amount of $163,078, plus reimbursement of the owners’ attorney’s fees of $176,976.75 and court costs of $17,976.75.

Recommendations. If the association wants an owner to satisfy certain conditions before construction can begin on a proposed remodel, the association should specifically and unequivocally so advise the owner in writing. In such a situation (and depending, of course, on the governing document provisions), instead of “conditionally approving” the application, it is generally better for the association to formally deny the application, list the reasons for the denial, and advise the owner to submit a new application with revised plans.