RESPONSIBILITIES AND DUTIES

AS A CONDOMINIUM OWNER, I THOUGHT I WAS RESPONSIBLE FOR THE MAINTENANCE AND REPAIR OF ONLY THE INTERIOR "AIRSPACE" OF MY UNIT? COULD I BE RESPONSIBLE FOR THE REPAIR OF ANY EXTERIOR BALCONY DECK?

Yes, under certain circumstances. There are important California statutes of which you should be aware to clarify why you are potentially responsible for the balcony deck.

California Civil Code §1364(a) states:

(a) Unless otherwise provided in the declaration of a common interest development, the association is responsible for repairing, replacing, or maintaining the common areas, other than exclusive use common areas, and the owner of each separate interest is responsible for maintaining that separate interest and any exclusive use common areas appurtenant to that separate interest.

Exclusive use common area is defined under Civil Code §1351(i) as follows:

(i) "Exclusive use common area" means a portion of the common areas designated by the declaration for the exclusive use of one or more, but fewer than all, of the owners of the separate interests and which is or will be appurtenant to the separate interest or interests.

(1) Unless the declaration otherwise provides, any shutters, awnings, window boxes, doorsteps, stoops, porches, balconies, patios, exterior doors, door frames, and hardware incident thereto, screens and windows or other fixtures designed to serve a single separate interest, but located outside the boundaries of the separate interest, are exclusive use common areas allocated exclusively to that separate interest. ...

[emphasis added]

Finally, all condominium projects have a Condominium Plan which is recorded in the County Recorder's office and which generally identifies the areas of the project which are considered part of the unit, areas which are exclusive use common areas / restricted common areas, and items which are solely common area. By a review of your Condominium Plan, the balcony could be considered part of your condominium unit, in which case, unless there is a different maintenance scheme contained within the association's CC&Rs, the balcony and its related deck would be the owner's maintenance responsibility, consistent with Civil Code §1364(a). A similar result could occur if the Condominium Plan identified the balcony area as exclusive use / restricted common areas. If both the CC&Rs and the Condominium Plan are silent or ambiguous as to whether or not the balcony area is exclusive use common area or part of the unit, it would, nevertheless, be considered exclusive use common area under the above-cited Civil Code §1351(i). In such a situation, unless the CC&Rs have a different maintenance scheme, the balcony area would then be the maintenance and repair responsibility of the owner, consistent with Civil Code §1364(a).

In summary, areas that are serving the separate interest of the unit owners, such as patios and balconies, are normally the maintenance and repair responsibility of the owner, unless the maintenance and repair responsibility for such areas are specifically allocated to the association under the CC&Rs.

IS IT REQUIRED FOR AN ASSOCIATION TO HAVE A RESERVE ACCOUNT? OUR ASSOCIATION MEMBERS SIMPLY VOTE TO IMPOSE A SPECIAL ASSESSMENT WHEN NEEDED FOR REPAIR OR REPLACEMENT OF OUR MAJOR COMPONENTS.

No, a reserve fund is not required under California law. California Civil Code §1365.5(g), states in pertinent part:

..."reserve account requirements" means the estimated funds which the association's board of directors has determined are required to be available at a specific point in time to repair, replace, or restore those major components which the association is obligated to maintain.

Furthermore, California Civil Code §1365 provides that unless the governing documents impose more stringent standards, the association must prepare and distribute to its members a pro forma operating budget which should include:

(2)A summary of the association's reserves based upon the most recent review or study ... which shall be printed in bold type and include all of the following:

(A) The current estimated replacement cost, estimated remaining life, and estimated useful life of each major component.

(B) As of the end of the fiscal year for which the study is prepared:

(i) The current estimate of the amount of cash reserves necessary to repair, replace, restore, or maintain the major components.

(ii) The current amount of accumulated cash reserves actually set aside to repair, replace, restore, or maintain major components.

(iii) ...

(C) The percentage that the amount determined for purposes of clause (ii) subparagraph (B) equals the amount determined for purposes of clause (i) of subparagraph (B).

(3) A statement as to whether the board of directors of the association has determined or anticipates that the levy of one or more special assessments will be required to repair, replace, or restore any major component or to provide adequate reserves therefor.

(4) A general statement addressing the procedures used for the calculation and establishment of those reserves to defray the future repair, replacement, or additions to those major components that the association is obligated to maintain.

Other than providing the information as set forth above, the statute does not dictate how an association should fund its reserves and how much it should maintain in the reserves. However, the association's CC&Rs may have specific requirements for funding reserves. Additionally, even if there are no specific provisions in your governing documents, we do not recommend funding only through special assessments. This type of funding is risky, because it requires membership approval if the special assessment exceeds five percent of the association's budgeted expenses. Furthermore, an association should be in a position to carry out its fiduciary obligations of repairing and replacing major components in a responsible and timely fashion, which may be difficult to do if member approval is required beforehand.

We wish to emphasize that reserve requirements under the Davis-Stirling Common Interest Development Act are primarily focused on disclosure, and that there are detailed requirements by the association to identify the amount of funds it should have on hand to repair and/or replace the major components it is obligated to maintain that have an estimated useful life of 30 years or less. This disclosure must be provided to the homeowners every year with the distribution of the pro forma operating budget, not less than 45 nor more than 60 days prior to the beginning of each association's fiscal year. This information must be provided to all homeowners at the time they purchase a unit within the common interest development. A lack of funding of reserves could have a major impact on the value of the homes within the project, particularly if the association is severely underfunded in its reserve account. Finally, although it is a difficult case to prove, an individual owner could attempt to sue a board of directors for breach of fiduciary duty when it attempts to impose a very large special assessment to fund a large expenditure, such as a roof replacement, because there were not sufficient funds in the reserves to pay for same.

For the foregoing reasons, we strongly recommend that all community associations fund reserves by either allocating a portion of their existing regular monthly assessments to the reserve account, by increasing the regular monthly assessment with the additional increase going to fund reserves, or by small, periodic special assessments in amounts that would not make a major dent in the owner's budget.

OUR ASSOCIATION IS SHORT OF FUNDS IN ITS OPERATING ACCOUNT DUE TO EXTRAORDINARY UTILITY BILLS. CAN THE ASSOCIATION TRANSFER MONIES FROM ITS RESERVE FUNDS TO MEET THE SHORTFALL?

California Civil Code provides at § 1365.5(c)(1), that

The board of directors shall not expend funds designated as reserve funds for any purpose other than the repair, restoration, replacement, or maintenance of, or litigation involving the repair, restoration, replacement, or maintenance of, major components which the association is obligated to repair, restore, replace, or maintain and for which the reserve fund was established. (Emphasis added.)

Based upon Civil Code § 1365.5(c)(1), California law prohibits the board from expending funds that are "designated as reserve funds" for any purpose other than repair, replacement, or maintenance of major components for which the association is obligated to maintain and for which the reserve was established.

The association may, however, use reserve funds to meet short-term cash flow requirements for its general operating fund, or other related expenses. In order to do this, the board must follow the requirements of Civil Code § 1365.5(c)(2), which state:

However, the board may authorize the temporary transfer of money from a reserve fund to the association's general operating fund to meet short-term cash-flow requirements or other expenses, provided the board has made a written finding, recorded in the board's minutes, explaining the reasons that the transfer is needed, and describing when and how the money will be repaid to the reserve fund. The transferred funds shall be restored to the reserve fund within one year of the date of the initial transfer, except that the board may, upon making a finding supported by documentation that a temporary delay would be in the best interests of the common interest development, temporarily delay the restoration until the time which the board reasonably determines to be necessary ... (Emphasis added)

Thus, California law permits the temporary transfer of money from the reserve fund to meet short-term cash-flow requirements. This means that the money must be paid back promptly. Additionally, this means that long-term or chronic shortages in the operating fund cannot be met by indefinitely draining the reserve fund.

The board generally must restore the money back to the reserves within one year. However, the return of the money to the reserves may be "temporarily" delayed longer than one year. In order to delay repayment longer than one year, the board must make a written finding, supported by appropriate documentation, that it is in the association's best interests to do so. If the board makes such a finding, the return of the funds to the reserve account may be delayed until a date that the board "reasonably determines" is necessary. In our opinion, such a delay is reasonable up to one (1) additional year, but longer time periods are risky and expose the association to liability for failing to meet its obligations to responsibly maintain the reserves.

OUR BOARD IS CONTEMPLATING DROPPING ITS DIRECTORS AND OFFICERS LIABILITY INSURANCE (SOMETIMES CALLED "D&O" COVERAGE) TO SAVE MONEY. IS INDEMNIFICATION OF THE BOARD IMPORTANT AND IS D&O COVERAGE NECESSARY?

Most governing documents contain provisions which require that an association indemnify and hold harmless all directors, officers and employees of the association (as well as committee members) so long as their actions were performed in good faith and for a purpose reasonably related to be in the interest of the association. Such provisions are commonplace within most association's governing documents and are consistent with Corporations Code § 7237, which states that

[A] corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any proceeding ... by reason of the fact that such person is or was an agent of the corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the corporation ...

It is important to note that officers and directors of an association act as volunteers for no remuneration and they should not be at risk for any liability whatsoever when acting in that capacity for the benefit of the association. If an officer or director, while serving in that capacity, was exposed to a risk of liability, associations would have great difficulty in securing volunteers to serve in their respective capacities on behalf of the association. It may also be appropriate to distinguish between General Liability and Directors and Officers ("D&O") liability insurance.

A General Liability policy is procured to protect the association and the individual unit owners against financial loss from claims due to bodily injury or property damage arising out of operations of the association's maintenance of the common area and other areas it maintains (commonly referred to as "premises liability"). In other words, the general liability provides coverage for claims arising from "slip and falls" and similar personal injuries and property damage claims.

A D&O liability insurance policy protects both the association and officers and directors from liability against claims from its members or third parties for errors and omissions in the performance of their duties. D&O liability insurance also provides defense and insurance coverage for any claims against a director, officer, employee, committee member, or even a property manager that the association is obligated to indemnify under the governing documents. Finally, the D&O coverage generally affords defense and insurance coverage to many claims which are otherwise excluded by the association's general liability policy. For example, if the board of directors and/or its architectural committee wrongfully withheld architectural approval to a proposed change to the exterior of a unit within ABC Association, the owner making the requested proposed change may sue the association. In most instances, the association's D&O coverage would both defend and cover the claim.

Having a D&O liability policy with the broadest coverage available protects not only the individual directors serving on the board, but also the association from expending funds in defending claims which many times are frivolous but costly. In effect, it shifts the risk of liability from the association over to the insuring company.

Additionally, Civil Code § 1365.7 provides volunteer immunity to directors who serve on association boards and provides in pertinent part:

(a) A volunteer officer or volunteer director of an association, ... shall not be personally liable in excess of the coverage of insurance specified in paragraph (4) to any person who suffers injury, including, but not limited to, bodily injury, emotional distress, wrongful death, or property damage or loss as a result of the tortious act or omission of the volunteer officer or volunteer director if all of the following criteria are met:

(1) The act or omission was performed within the scope of the officer's or director's association duties.

(2) The act or omission was performed in good faith.

(3) The act or omission was not willful, wanton, or grossly negligent.

(4) The association maintained and had in effect at the time the act or omission occurred and at the time a claim is made one or more policies of insurance which shall include coverage for (A) general liability of the association and (B) individual liability of officers and directors of the association for negligent acts or omissions in that capacity; provided, that both types of coverage are in the following minimum amount:

(A) At least five hundred thousand dollars ($500,000) if the common interest development consists of 100 or fewer separate interests.

(B) At least one million dollars ($1,000,000) if the common interest development consists of more than 100 separate interests. ...

In order for individual board members to get the benefit of this immunity statute, the association must maintain at least $1,000,000 of coverage if the project has more than 100 units and at least $500,000 if it has 100 or less units. Thus, it is imperative that the association continue to provide D&O insurance in order to protect its directors and officers for damages above and beyond what insurance will cover.

Finally, it would never be advisable or prudent for any homeowner of an association to run for the board of directors if the association did not carry D&O coverage. Board members are unpaid volunteers working hard on behalf of a corporation who, in return for acting in good faith, should be afforded personal immunity and indemnity against unforeseen losses or claims.

We strongly advise that an association maintain its D&O coverage and seek other ways in which to cut costs.

WHAT ARE AN ASSOCIATION'S DUTIES AND OBLIGATIONS RELATED TO PLAYGROUND EQUIPMENT?

In light of the more than 200,000 children who go to hospital emergency rooms each year with injuries obtained at playgrounds, California passed a law effective January 1, 2000, which established the Playground Safety and Recycling Act of 1999 (the "Act") and requires playground upgrades to meet strict safety guidelines. The law specifically includes "subdivisions" as playground operators under the new guidelines and, thus, common interest developments with playgrounds (defined as "an improved outdoor area designed, equipped, and set aside for children's play that is not intended for use as an athletic playing field or court") must also comply.

Although the statute requires that all playgrounds be inspected by a Certified Playground Safety Inspector by October 1, 2000, conformance with the new safety guidelines is dependent upon when the playground was constructed. Playgrounds built between January 1, 1994 and December 31, 1999 do not have to comply with the new regulations under the Act until 15 years after the playground's construction date. However, they must still at least comply with the Federal Guidelines set forth in the Handbook for Public Playground Safety, published by the U.S. Consumer Product Safety Commission. If the playgrounds do not meet the minimum federal guidelines, the association must upgrade pursuant to the Act by January 1, 2003. All other playgrounds, if necessary based upon their inspections, must be upgraded to meet the more stringent safety guidelines by January 1, 2003. Upgrades may include implementation of changes in the design, installation, inspection, maintenance and supervision of its playgrounds that are identified by the Inspector. Changes may include:

• Upgrading surfaces around playground equipment to at least 12 inches of wood chips, mulch, sand, or pea gravel or mats made of safety-tested rubber or rubber-like materials,
• Extending equipment protective surfaces to at least 6 feet in all directions,
• Making sure spaces that could trap children measure less than 3.5 inches or more than 9 inches, and
• Installing guardrails on elevated surfaces such as platforms and ramps.

In addition to the possible foregoing changes, associations should also regularly inspect their playgrounds and playground equipment for the following:

• Stability of footings,
• Loose nuts and bolts,
• Sharp points and edges or protruding bolt ends, and
• Trip hazards such as exposed concrete footings and tree stumps.

Regardless when a playground was constructed, we recommend that associations make any necessary safety upgrades as soon as feasible in order to minimize liability exposure for possible claims or injuries occurring at the playground. We also recommend contacting the U.S. Consumer Product Safety Commission to obtain additional information and a copy of the Handbook for Public Playground Safety (Publication #325, November 1994). The Commission may be contacted at 1-800-638-2772 or www.cpsc.gov.

DOES THE ASSOCIATION HAVE A DUTY TO REPORT SEX OFFENDERS IN THE COMMUNITY?

NO. Megan's Law was enacted in California in 1996. The law requires all sex offenders to register with the state. However, the state only discloses information on serious or high-risk sex offenders. Other sex offenders (individuals convicted of pornography, exhibitionism, incest, spousal rape or misdemeanor sexual battery) who do not fit either the serious or high-risk category must also register but are not subject to disclosure under the law. The registry is available on CD-ROM for free at a law enforcement agency viewing station or by telephone at $10.00 per call for up to two names.

The board of directors does not have a legal obligation to disclose the name of any known sex offenders living within the community. However, the board may wish to advise its members of the possibility that a sex offender may live among them and how they can obtain information if so desired. The following disclosure may be used.

Notice of Sex Offender Data Base. The California Department of Justice, sheriff's departments, police departments serving jurisdictions of 200,000 or more, and many other local law enforcement authorities maintain for public access a data base of the location of persons required to register pursuant to paragraph (1) of subdivision (a) of Section 290.4 of the Penal Code. The database is updated on a monthly basis and a source of information about the presence of those individuals in any neighborhood. The Department of Justice also maintains a Sex Offender Identification Line ("900" telephone service) through which inquiries about individuals may be made. Callers must have specific information about individuals they are checking. Information regarding neighborhoods is not available through the "900" telephone service.

The Association makes no representations, warranties or guarantees regarding the presence or absence of registered sex offenders within the subdivision or in the surrounding area. The Association has no obligation or duty to investigate existing residents or buyers to determine whether there are sex offenders. Homeowners are solely responsible for making his or her own investigation.

HOW LONG MUST AN ASSOCIATION RETAIN ITS CORPORATE RECORDS?

IT DEPENDS. We are frequently asked for guidance on the length of time that associations should retain its various business records. Unfortunately, there are very few statutory guidelines upon which an association may rely related to records retention. There are some guidelines related to labor records, which we address below. Otherwise, maintenance of association records is primarily by administrative decision of the association. A board resolution should be adopted so that both management and staff understand their obligations. Based upon our long experience in representing homeowners associations and our discussions with various CPAs who specialize in the representation of homeowner associations, we recommend the following lengths of time for financial and accounting records:

FINANCIAL AND ACCOUNTING RECORDS

(Based on Requirements of Federal and State Laws)

5 YEARS:

• Accounts Payable Ledger
• Accounts Receivable Ledger
• Bank Deposit Slips
• Bank Reconciliations
• Bank Statements and Cancelled Checks
• Paid Vendor Invoices - Operating

7 YEARS:

• Budgets
• Monthly Financial Statements

PERMANENT:

• Year End Financial Statements
• Annual Audit or Review Report
• Office Equipment Records
• Tax Returns
• Tax Bills and Statements

LABOR RECORDS

5 YEARS:

• Personnel Files
• Payroll Registers
• Applications for Employment
• Employee Changes and Terminations
• Employee Contracts

7 YEARS:

• Attendance Records

PERMANENT UNLESS SUPERSEDED

• Job Descriptions

RESERVES

PERMANENT RECORD:

• Reserve Studies
• Invoices for Reserve Items
• Measurements of Common Areas
• Contracts for Work Performed
• Maintenance / Repair Records
• Common Area Inventory Listing

OPERATIONS

7 YEARS (if Warranty Period in Excess of 7 Years, 4 Years after Expiration Date of Warranty ):

• Bids, Awards, Contracts

PERMANENT RECORD UNTIL COLLECTED:

• Assessment Collection Records for Unsatisfied Accounts

5 YEARS:

• Assessment Collection Records for Satisfied Accounts and/or Paid in Full

LOT FILES

PERMANENT:

• All Matters involving Architectural / Landscape Issues - Present or Former Owners

DELETE FROM LOT FILE WHEN LOT IS SOLD TO NEW OWNER:

• Violations of Non-Permanent Nature (such as Parking, Pet and Non-Architectural Violations)

DELETE 3 YEARS AFTER FINAL PAYMENT IS MADE:

• Billings for Paid Assessments

ADMINISTRATIVE

PERMANENT RECORDS:

• Governing Documents
• Minutes
• Resolutions
• Insurance Records
• California Civil Statutes Compliance Documentation:
• Annual Budget Disclosure
• Annual Reserves Disclosure
• Annual Assessment Collection Policy Disclosure
• Civil Code § 1365 Signature Compliance
• Summary of Insurance Information
• All Other Election Matters, such as:
  • Amendments
  • Membership Action

2 YEARS:

• Election Records Related to Election of Directors

PERMANENT UNLESS ATTORNEY ADVISES OTHERWISE

• Non-Collection Legal Matters
  
  

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