INSIDE THIS ISSUE:
        - Summary of New Laws Impacting Homeowners Associations
        - Review of Recent Court Cases
        - Holiday Party Photos
        - Additional Hoops for Additional Insureds?
        - Warning of Defective Furnaces

SUMMARY OF NEW LAWS IMPACTING HOMEOWNERS ASSOCIATIONS

This past Legislative session resulted in several important new laws that will become effective on January 1, 2001. The following is a summary of the significant new California laws that affect community associations:

A. ASSEMBLY BILL 860 - USE RESTRICTIONS REGARDING PETS

As was reported in the Fall, 2000 Peters & Freedman, L.L.P. Newsletter, AB 860 adds a new section to the Davis-Stirling Common Interest Development Act which will ensure that pets have a continued place in association living.

Civil Code Section 1360.5 places restrictions on the ability of associations to prohibit pets in their governing documents. The new section requires that owners be allowed to keep a minimum of one (1) pet within a project, subject to reasonable rules and regulations. The statute defines "pet" as any domesticated bird, cat, dog, aquatic animal within an aquarium. Furthermore, this code section allows associations and owners to reach an agreement as to what animals beyond those delineated will be considered a "pet."

Section 1360.5 only applies to new or amended governing documents that are enacted or modified after January 1, 2001. The new law also allows those pets which are acceptable under the governing documents prior to January 1, 2001 to remain. If your association is considering any amendments to its governing documents, you should consult legal counsel regarding whether the pet use restriction also needs to be amended.

B. ASSEMBLY BILL 1859 - ASSESSMENTS EXEMPT FROM JUDGMENTS

Assembly Bill 1859 adds a subsection to Civil Code Section 1366 which requires homeowners associations to levy regular and special assessments to perform their obligations. The added subsection provides limited protection to the regular assessments collected by the association from execution of money judgments against the association.

Under new Civil Code Section 1366(c), an association's regular assessments will be exempt from execution of a money judgment to the extent the assessments are necessary to provide "essential" services, such as utilities and insurance. The statute further provides that the court will have to ensure that the exemption is limited to only "essential" services.

This "essential" services exemption will not apply to liens, pledges or encumbrances consented to by the association and which have been approved by a vote of the membership. Furthermore, the exemption will not apply to liens for state taxes or labor and materials supplied to the common area.

C. ASSEMBLY BILLS 1823 AND 2284 - DISCIPLINE AND DISCLOSURE, DUAL DUTIES DECLARED

These Assembly Bills cover two areas pertinent to homeowners associations: (1) notices to be sent to a member when member discipline is being considered, and (2) disclosure by a seller to a buyer of any monetary fines or penalties assessed to the owner and unpaid, and of any notice sent regarding an alleged violation of the association's governing documents that remains unresolved.

I. Notices Sent to Members Regarding Discipline

When an association intends to take disciplinary action against a member, (i.e fines, suspension of rights, special assessments against the individual member), it has always been required that associations provide fair and reasonable notice to the member of such intended action, as set forth in Corporations Code Section 7341. That Section provides that a suspension or expulsion of a member is fair and reasonable when (1) the provisions have been set forth in the articles or bylaws, or copies of such policy are distributed to the members annually, (2) at least 15 days notice is given to the member of the intended action, and (3) the member is provided the opportunity to be heard, either orally or in writing, not less than five (5) days prior to the effective date of the intended action.

Newly amended Civil Code Section 1363(h) supplements and strengthens existing law so that now when a board imposes a disciplinary action against a member, it will not be effective unless the following requirements are met:

•Written notice is given, either by personal delivery or first-class mail, at least 10 days prior to such meeting

• The written notice must at minimum contain the following:

• the date, time and place of such meeting;

• the nature of the alleged violation on which the discipline is being brought;

• a statement that the member has a right to attend and may address the board at the meeting.

• If an action is imposed (i.e., fine, assessment or suspension) at such meeting, additional written notice sent in the manner stated above shall be sent to the member within 15 days following such action.

In lieu of the board continually scheduling separate hearings, at which members often fail to appear, the board may meet the above requirement by sending out the notice at least 10 days prior to the regularly scheduled board meeting, and determine to have the hearing either before the meeting or at the end of the meeting, as long as a specific time as possible is contained in the notice.

II. Disclosure of Violations/Fines at Time of Sale

Newly amended Civil Code Section 1368(a)(4) adds a disclosure requirement by the seller of a home within an association as to any "monetary fines or penalties levied upon the owner's interest and unpaid on the date of such statement." This can be included as part of the escrow packet typically prepared by an association or its managing agent upon escrow being opened. Be sure to include this as a separate added line item for "Unpaid fines/penalties", even if the real estate agent or escrow "checklist" does not include such a request.

Also amended, Civil Code Section 1368(a)(5) now requires a "copy or summary" of any disciplinary notice pursuant to newly adopted Civil Code Section 1363(h) (discussed above) that has previously been sent to the owner regarding any alleged violation of the governing documents that remains "unresolved at the time of the request." Fortunately, the notice is specifically not deemed to be a waiver of the right of an association to enforce the violation, either as against the current owner or prospective purchaser, and does not require an association to "inspect" property each time a sale is to occur to determine whether any violations exist.

D. SENATE BILL 2011 - SENIOR CITIZEN HOUSING

In any California county, it is unlawful to discriminate in the sale or rental of housing based upon age, except for "senior housing." Under California law, in order to qualify as a senior housing community, certain requirements must be met, including provisions for accommodations designed to meet the physical and social needs of senior citizens.

Prior to January 1, 2001, the law gave those senior housing communities that were constructed prior to February 8, 1982, an exemption for meeting the physical and social needs criteria, provided they met a less stringent criteria that was set forth in Civil Code Section 51.4. The exemption recognized that some senior communities would have difficulty in complying with the requirements to become a senior housing community. However, the exemption expired on January 1, 2001 (except for Riverside County where senior housing developments are already exempt from certain requirements to qualify as a "senior housing community").

SB 2011 addressed the expiration of the exemption. Under the new amendments, all senior housing communities constructed prior to February 8, 1982, are permanently exempt from the requirement to have accommodations to meet the physical and social needs of senior citizens. SB 2011 also replaces the population density formula contained in the definition of "senior citizen housing development" to require 35 senior citizen dwelling units in all counties (except Riverside which will require 20 units).

Other amendments contained in SB 2011 affect the definition of a "qualified permanent resident" who is a spouse, cohabitant, or person 45 years or older who is residing with a "qualified resident" who is at least 55 years or older. The Bill changes the definition of "cohabitant" to include domestic partners, as well as husband and wife. Additionally, previously, adult children of "qualified permanent residents" or "qualified residents" who have a disabling condition or injury could fall under the definition of "qualified permanent residents." SB 2011 extends this definition of "qualified permanent resident" to grandchildren of "qualified permanent residents" or "qualified residents" who have a disabling condition or injury. However, an association's board can now deny the child or grandchild status as a "qualified permanent resident" if it determines, based on credible objective evidence after notice and hearing, that the child or grandchild is likely to pose a significant threat to the health and safety of others, that cannot be ameliorated by means of a reasonable accommodation. Furthermore, if the disability condition ends, the board may give the child or grandchild six months notice to cease residing in the unit or can extend the period for up to one year.

SB 2011 also allows family members who provide live-in health care services, defined as "Permitted Health Care Resident", to be compensated with room and board. Additionally, upon written request of the resident, care givers can stay in the residence during the temporary absence of the resident provided the resident is hospitalized or is undergoing other medical treatment, so long as the treatment is not expected to exceed 90 days. The board has discretion to extend the 90 day period by an additional 90 days if it appears the resident will return within that extended period.

E. CONCLUSION

This past year gave us a handful of legislative changes to the Davis-Stirling Common Interest Development Act. While not large in number, these changes will definitely affect how associations function on everyday items including fines, pets and assessments. As the California Legislature continues to clarify this constantly-growing area of the law, we will continue to keep you updated and informed.

REVIEW OF RECENT COURT CASES
   - By Simon J. Freedman, Esq.

The year 2000 resulted in a handful of cases which directly affect community associations and how they can function. Because many of these cases were previously reported in the four Peters & Freedman L.L.P. 2000 Newsletters, the following is a brief review, highlighting the important legal principals set forth in each case. These cases are helpful in that they clarify many questions which face associations on a daily basis. If you have questions about any of the legal principals contained in these cases, please contact legal counsel.

A. ARCHITECTURAL COMMITTEE DISCRETION --- Dolan-King v. Rancho Santa Fe Association (2000) 81 Cal. App. 4th 965.

In Dolan - King v. Rancho Santa Fe Association (2000) 81 Cal.App.4th 965, the Fourth District Court of Appeal upheld the power of an architectural committee to use subjective discretion in its denial of an application for improvements to a residence. The owner submitted an architectural application for a new perimeter fence as well as " turret-style" additions to her living and family rooms. The association's "Art Jury" (i.e., architectural committee) denied her applications, finding that her proposed improvements were inconsistent with both the unrecorded architectural guidelines and the recorded covenants. The owner appealed to the Board, which upheld the Art Jury's decision. The owner then brought suit.

On appeal, Dolan-King did not challenge the power or authority of the board, nor its duty to enforce and interpret the CC&Rs. Rather, she argued that the CC&Rs only authorized the architectural committee to make very general suggestions as to the exterior design and location of the improvements and, thus, were not empowered to reject her applications. The Court rejected this argument as too narrow, explaining that "reading the [CC&Rs] as a whole, the Art Jury and the board are empowered to render judgments on property improvement applications based upon subjective as well as objective criteria."

Under the guidelines of the 1999 California Supreme Court decision, Lamden v. La Jolla Shores Clubdominium Homeowners Association (1999) 21 Cal. 4th 249, the Dolan Appellate Court used a "judicial deference" test to determine whether the actions of the Board in upholding the Art Jury's decision were proper. As applied in this case, under the "judicial deference" test, so long as the "Art Jury and Board acted within the authority granted to it by the Covenant (CC&Rs), pursuant to a reasonable investigation, in the best interests of the community and not in an arbitrary manner, we will respect and uphold their decisions." The burden of proving that the board has not acted properly is upon the person challenging the decision of the board. Here, the court examined both the Art Jury's reasons for denying the applications, and the Board's action in upholding those decisions and determined that Dolan-King did not meet her burden of proving that the Board acted improperly.

In reaching its decision, the Dolan - King Court was persuaded by the Covenant's stated goal of uniform and high standards and its purpose of protecting the attractiveness and value of the area. Associations enact and distribute architectural standards in order to guide the owners in what will be acceptable to the association. Courts will generally defer to the guidelines, finding that such guidelines should be upheld if there is "nothing inherently unreasonable about the guidelines themselves. . . They are the association's attempt to give the property owners guidance by way of detailed examples and explanation, on the criteria used by the art committee and the board in reviewing proposed improvements and exercising their broad discretion under the covenant. . ." Therefore, the subjective evaluations by an architectural committee, although not measurable or quantifiable, will be upheld unless the decision can be found to be "wholly arbitrary."

The Appellate Court also addressed the question of what is an "arbitrary decision." Where rules have been applied against one homeowner and not against others, that action could be deemed "arbitrary" and not upheld.

B. CONDOMINIUM ASSOCIATIONS AND THE ATTORNEY-CLIENT PRIVILEGE --- Smith v. Laguna Sur Villas Community Association (2000) 79 Cal.App.4th 639.

The attorney-client privilege, provided under California law, protects divulgence of conversations between attorneys and their clients. This protection aids clients in being able to freely speak with their lawyers. In the context of corporations and homeowners associations, the issue often becomes who is the "client" for purposes of protecting the privilege. The parameters of the attorney-client privilege in the specific context of community associations, were delineated in the April, 2000 case of Smith v. Laguna Sur Villas Community Association 79 Cal.App.4th 639. In Smith, the California Appellate Court held that when a board retains a law firm or lawyer, the board of the condominium association is the holder of the attorney-client privilege. As such, the board is not required to disclose attorney-client privileged information to individual homeowners.

The Smith decision gives community association boards and their legal counsel clear direction on who is entitled to claim the attorney-client privilege in the community association setting. Every board member that has hired legal counsel should understand the meaning of this decision and, more importantly, affirmatively recognize the parameters of the privilege and how it can be waived.

C. DANGEROUS CONDITIONS ON PROPERTY --- Alpert v. Villa Romano Homeowners Association (2000) 81 Cal.App.4th 1320.

In late May, 2000, a California Appellate Court determined that a homeowners association may have a duty to warn or protect third parties about dangerous conditions in sidewalks across its property, even when the sidewalk is not owned by the association! In the case of Alpert v. Villa Romano Homeowners Association, Ms. Alpert tripped and fell on a sidewalk that was adjacent to the association's property and sustained serious injuries. Ms. Alpert sued the Association, seeking compensation for her personal injuries.

Prior to this decision, California Appellate Courts were mixed on this point. In Contreras v. Anderson (1998) 59 Cal.App.4th 188, one California appellate court determined that an adjacent landowner did not have a duty to warn third parties about a dangerous sidewalk since the owner merely performed periodic trimming of trees, gardening, sweeping, and removal of trash on the property. However, in contrast, the 1997 California Supreme Court decision of Alcarez v. Vece (1997) 14 Cal.4th 1149 determined that an adjacent landowner was liable to third parties for a dangerous condition on real property.

The issue that courts tend to focus on in determining an adjacent landowner's liability is the degree of possession and control the defendant exercises over the property in question. Where an adjacent landowner exercises sufficient possession or control over that land, he or she then has a duty to take reasonable measures to protect persons from dangerous conditions on that adjoining land.

In the Alpert case, Ms. Alpert tripped over a portion of the adjacent sidewalk that had been uplifted due to tree roots growing under the sidewalk. The court determined that because the homeowners association planted and maintained all of the trees and vegetation in the area on both sides of the sidewalk, had installed sprinklers, and watered and trimmed the trees which grew the offending roots, the association had exercised sufficient possession and control over the adjacent sidewalk and was therefore obligated to warn third parties of the dangerous condition in the sidewalk.

The Appellate Court also concluded that the association's knowledge about the dangerous condition on the walkway and its discussions about repairing the sidewalk prior to Ms. Alpert's fall further evidenced the association's possession and control over the sidewalk, and thus, its duty.

This case, as well as the Contreras and Alcarez cases demonstrate that an adjacent landowner's liability for injuries is largely a factual determination of the control and possession exercised over the property in question.

D. ASSESSMENTS

1. PRIORITY OF ASSESSMENT LIENS - Thaler v. Houehold Finance Corp. (2000) 80 Cal.App.4th 1093.

This case raised the issue of the priority that homeowners association assessment liens have over other recorded documents. The plaintiff, Mr. Thaler purchased his condominium at an association's non-judicial foreclosure. The association's Notice of Delinquent Assessment (" NOA") had been recorded in 1997, after a first and second deed of trust had been recorded against the property. The association's CC&Rs provided that the association's assessment liens would be subordinate to a subsequently recorded first deed of trust. Mr. Thaler claimed that the NOA related back to the date the CC&Rs were recorded, which was prior to the recording dates of both the first and second deed of trust. He argued that the second deed of trust had been effectively "wiped out" by the association's foreclosure of its assessment lien and because the CC&Rs only provided for subordination of first deeds of trust.

The appellate court confirmed California's rule of "first in time, first in right" to determine the priority of liens on real property. The court rejected Mr. Thaler's claim that the association's lien "related back" to the date the original CC&Rs were recorded. Since the NOA had been recorded after both the first and second deeds of trust, neither document was "wiped out" by the foreclosure sale.

2. USE OF ASSESSMENTS FOR POLITICAL MEASURES - Finley v. Superior Court (2000) 80 Cal.App.4th 1152.

This case involved a large common interest development called "Leisure World" which is located near a Marine Corps Air Station ("MCAS"). The MCAS was proposed for conversion into a commercial airport. A local ballot measure sought to prevent that conversion. The Leisure World community associations, consisting of both a master association and sub-associations, contributed in excess of $500,000.00 to a political action committee supporting the anti-conversion measure.

The plaintiffs, members of the Leisure World master and sub-associations, sued, claiming that the use of mandatory assessments to support a political measure was beyond the authority of the associations under their governing documents. The plaintiffs further contended the use of assessments in this manner violated the Davis-Stirling Common Interest Development Act and that the board members had breached their fiduciary duty.

The court rejected the plaintiffs' claims and cited several sections of the governing documents which conferred broad authority to the board and allowed it to engage in any business or activity permitted by the governing documents or California nonprofit benefit corporation law.

E. LIABILITY OF OWNERS FOR ASSOCIATION CONTRACTS --- ECC Construction, Inc. v. Ganson (2000) 82 Cal.App.4th 572.

In this case, a homeowners association entered into a contract with a construction company to repair damage caused by the 1994 earthquake in Northridge. The construction company filed suit against the association and its 300 owners, claiming that over 2 million dollars was owed. The construction company also filed mechanic's liens against the residential units within the development and sought to foreclose on those liens. The individual owners had not signed the contract with the construction company.

The trial court ruled that the individual owners were not proper parties to the contract and effectively dismissed them from the lawsuit. The appellate court agreed, relying on Corporations Code Section 7350(a) which states that members of a nonprofit mutual benefit corporation are not personally liable for the debts, liabilities or obligations of the corporation. The court determined that the construction company's only recourse was to seek monetary damages against the association.

On the construction company's mechanic's lien claim, the court determined that because it had not notified the individual owners of the reasonable value of the work undertaken with respect to each unit, as required by Civil Code Section 3123(a), the lien was unenforceable against the individual owners.

  HOLIDAY PARTY PHOTOS

To allow for faster downloads of this newsletter, we hav paced the holiday photos on a separate page. Click this link to be taken to the Peters & Freedman holiday photos.

ADDITIONAL HOOPS FOR ADDITIONAL INSUREDS?
   - By Mark T. Guithues, Esq.

Imagine this situation: an association uses a contractor to provide services based on individual written service orders, rather than a contract. This happens almost every day. Examples of this type of relationship include occasional cleaning services, flood remediation services, plumbing, and (non-warranty) roof leak repairs. In these types of situations, an association will most often require that it be named to the contractor's insurance policy as an additional insured. The contractor may even give the association a Certificate of Insurance indicating that it is an additional insured. What the association may not know, however, is that the fine print on the Certificate likely provided that the policy is subject to a separate endorsement which, conveniently, is not attached to the Certificate.

If a claim were to arise in this situation, it is likely that the insurer will refuse to make payments because there was no underlying contract with the association and the endorsement had never been executed. Whether or not the omission of the endorsement was intentional, managers and boards of directors should be aware that some of the Certificates of Additional Insureds now contain language requiring a separate endorsement. In these instances, the separate endorsements should be executed before allowing the contractor to perform work on the association property.

Please review any Certificates of Additional Insureds which you receive. Additionally, if your association is using the services of an "outside" contractor on a routine basis, please consider requesting that the contractor sign a simple contract which indemnifies the association in the event of a loss caused by work performed by the contractor. Finally, if you find yourself in the position of having no underlying contract and a Certificate of Additional Insured requiring an additional endorsement but having no endorsement, please contact your association's legal counsel to determine if there are any other available remedies against the insurer.

SAFETY ALERT: WARNING OF DEFECTIVE FURNAES IN CALIFORNIA HOMES
   - By Steven R. Napoles, Esq.

In September, 2000, the Consumer Products Safety Commission (CPSC) issued a warning for 190,000 furnaces sold in California from 1983 to 1994. The CPSC warning covers gas-fired horizontal forced-air furnaces manufactured by Consolidated Industries (formerly known as Premier Furnace Company). The warning specifically focuses on the substantial fire risk that the Consolidated/Premier furnaces present.

These furnaces were sold under a variety of names including: Addison, Amana, American Best, American Standard, Bard, Century, Comfort Aire, Coleman, Consolidated, Franklin Electric, Goettl, Goodman, Hamilton Electric, Heat Controller, Janitrol, Johnstone, Keeprite, Kenmore, Liberty, Magic Chef, P.F.C., Premier, Sears, Sunbelt, Sunburst, Sundial, Sun Glow, Trane and Weatherking. The defective furnaces can be identified by the presence of steel control rods installed above the burners. These particular models are normally found in the attic, but may also be installed in crawl spaces. The CPSC warning recommends that anyone who owns one of the furnaces have it inspected by a licensed heating contractor to determine if any problems exist. The CPSC also recommends that the fire danger posed by the defective furnaces can be reduced by:

1. Protecting the wood surfaces around the furnace by covering decking and rafters with a non-combustible material, such as cement board, extending one foot around the furnace;

2. Provide an airspace beneath the furnace (this should be done by a licensed contractor);

3. Make sure that the furnace is installed properly and serviced by a licensed contractor on an annual basis; and,

4. Install an ionization type smoke detector inside the attic or crawl space where the furnace is located.

Unfortunately, Consolidated/Premier, the manufacturer of the defective furnaces, has filed for bankruptcy and the availability of repair by the company is uncertain. For more information on the CPSC warning or affected models, log onto the following website: or call the U.S. Consumer Product Safety Commission at 1-800-638-2772.