HOA Governance

Navigating the Hidden Risks of Homeowner Security Devices

Published on: July 30, 2019 | by Steven J. Tinnelly, Esq.

residential-package As security technology becomes less expensive and more accessible to average consumers, homeowners are provided with an exponential increase in available options for exterior security devices. A cursory Amazon search reveals hundreds of such devices including motion sensor lights and home camera offerings that can be accessed remotely from the convenience of one’s smart phone. Given the benefits and low cost, many homeowners have installed security systems in and around their residences to mitigate the risk of theft, property damage, and other criminal activity. As purchases and installations of these devices increase, associations and architectural committees are increasingly confronted with the conflict between the owners’ interest in safety and security, and the association’s interest in uniform aesthetics and neighborhood privacy.

Association Regulation and Liability

Most common interest developments are structured and organized where the association maintains the residence/building exteriors and has the ability to regulate improvements attached and/or integrally related to them. This authority generally includes the ability to approve or deny owner applications to install exterior security devices. Some associations with strict architectural approval procedures may be inclined to significantly limit or outright reject owner installed exterior security devices. However, this approach can expose an association to potential liability, especially where there is a demonstrated need for such devices.

In the case of Frances T. v. Village Green Owners Assn. (1986) 42 Cal.3d 490, the California Supreme Court held that a homeowners association stands in relation to owners as a landlord and can be liable for breaches of traditional landlord duties such as failing to address unreasonable risks of criminal activity. The Court found that there was ample evidence to place the association on notice of an unreasonable risk to the plaintiff’s safety, and the failure to act or to allow the owner a self-help remedy subjected the association to liability.

In light of the holding in Frances T., associations should avoid outright prohibitions on owner installed exterior security devices. Instead, associations should develop and implement a comprehensive policy that governs the application, approval, and installation process for such devices. Such a policy allows the association to control the aesthetic characteristics, installation locations, and fields of view (for cameras) necessary to preserve the aesthetic appearance of the community, while preventing the devices from intruding into the seclusion of other residences and infringing privacy rights.

Exterior Security Device Policy

When developing an exterior security device policy, one of the primary considerations should be to limit the risk of invading the privacy of other residences. Generally, there is no recognized right of privacy in common areas. However, California acknowledges that privacy interests can be infringed through devices that provide a technological intrusion from otherwise lawful vantage points. Civil Code section 1708.8(b) states in pertinent part:

A person is liable for constructive invasion of privacy when the person attempts to capture, in a manner that is offensive to a reasonable person, any type of visual image . . . or other physical impression of the plaintiff engaging in a private, personal, or familial activity, through the use of any device, regardless of whether there is a physical trespass, if this image . . . or other physical impression could not have been achieved without a trespass unless the device was used.

Under the guidance of the foregoing prohibition against such privacy infringement, any approval of exterior security devices should be focused on ensuring that the primary purpose of the device is to advance the security interests of the applicant owner, and the device does not present an unreasonable risk of privacy invasion to other residences.

To limit the risk of privacy intrusions, a security device policy should contemplate the following requirements:

1. An installation plot plan/map should be submitted by the applicant to indicate the intended installation locations and their corresponding fields of view for any visual recording devices such as cameras.
2. Such fields of view should not be permitted to observe neighboring residences, exclusive use, or common areas. Depending on the development/community layout, some installations may not be possible without capturing some of the foregoing areas (such as a doorbell camera that points towards common area). The association body tasked with the review and approval of security device installations should ensure that in such cases, the primary purpose is to advance the security interests of the applicant and that any common area field of view is merely incidental and as limited as possible.
3. Cameras must be “fixed view”, without panning capabilities.
4. Finally, any approved installations should be revocable if the device violates the privacy of neighboring residences so as to constitute a nuisance.

Given the limitless permutations of common interest developments and their various layouts, there is no one size fits all approach to resolving the complex issues surrounding owner installation of exterior security devices. As such, consult with legal counsel to develop workable solutions to advance the association’s interests, while preserving the owners’ interest in security and privacy.

-Blog post authored by TLG Attorney, Tim D. Klubnikin, Esq.

Recent California Court of Appeals Ruling Demonstrates Broad Reach of Ban on Nuisances

Published on: May 7, 2019 | by Steven J. Tinnelly, Esq.

*Unpublished Opinion

The Court of Appeals recently rendered an unpublished opinion in Harbour Island Condominium Owners Association, Inc. v. Alexander (2019), which provides some clarity regarding a tenant’s right to attend board meetings and the ban on noxious activities within the community.

The Harbour Island Condominium Owners Association (“HOA”) sought a restraining order (known as a preliminary injunction) against two tenants and their landlord to abate the tenants’ noxious behavior. The HOA relied on the provision in the CC&R’s, which stated that residents cannot disturb the neighborhood or occupants of a neighboring property or create a nuisance.

Neighboring residents made several complaints to the HOA about the tenants’ excessive and purposeful noise: the tenants consistently stomped on their floors and slammed their doors. In addition to the noise complaints, tenants permitted their dog to urinate in the Common Area, despite the posted “No Dogs” signs. Lastly, the tenants engaged in aggressive behavior against the Board of Directors in an apparent attempt to intimidate Board Members. For example, the tenants secretly photographed a Board Member at the pool on different occasions.

The trial court granted the preliminary injunction, ordering the tenants and their landlord to install throw rugs throughout the unit and a sound-muffling device on the doors; to cease photographing Board Members; and to prevent their dog from urinating on the Common Area. The trial court ruled in favor of the HOA because the tenants’ noxious behavior unfairly oppressed the rest of the community, while the ordered corrective measures were minimally oppressive to the tenants.

The Court of Appeals upheld the trial court’s decision. Despite the fact that the HOA’s nuisance provision did not mention dogs, the Court broadly interpreted the existing provision to encompass the exclusion of dogs from the Common Area for health and safety reasons.

Furthermore, the Court held that the nuisance provision bans acoustic nuisances that interfere with a neighbor’s right to quiet enjoyment. In this case, the nuisance claims were supported by credible witness testimony that the tenants’ noise was excessive.

Lastly, the Court of Appeals disagreed with the tenants that their due process rights had been violated since the tenants were not permitted to challenge the violation notices at hearings. The Court held that only Owners with vested property rights are Members of the HOA. As such, only Members may participate in HOA meetings.

The Harbour Island case highlights the broad reach of nuisance provisions in CC&Rs and serves as a reminder that Owners, not tenants, have the right to attend and participate in HOA meetings.

-Blog post authored by TLG Attorney, Sarah A. Kyriakedes, Esq.

Workplace Harassment in a HOA Environment

Published on: April 18, 2019 | by Steven J. Tinnelly, Esq.

*New Library Article!

Untitled-1

Workplace harassment and hostile work environments are nothing new for management professionals. Emotionally charged conversations can become uncomfortable and antagonistic for many managers. Unfortunately, such dialogue frequently crosses the line from demanding direction to demeaning personal attacks.

Previously, employer liability for employee claims based on nonemployee conduct was generally limited to sexual harassment. Effective January 1, 2019, newly adopted California law (Senate Bill 1300) lowers the burden by which California employees can bring successful harassment claims against California employers and expands the scope by which those employers may now be responsible to their employees for third party, nonemployee conduct, among other things.

Our HOA attorneys have authored a new article to generally summarize SB 1300 and to discuss its application to common interest development practice.

The article, entitled “Workplace Harassment in a HOA Environment,” is available for download from our firm’s library. You can access the article by clicking here.

Voter Apathy Not a Required Showing in a Petition to Reduce Percentage of Affirmative Votes Required to Amend CC&Rs

Published on: April 16, 2019 | by Steven J. Tinnelly, Esq.

Amending a HOA’s Declaration of Covenants, Conditions and Restrictions (“CC&Rs”) can be a challenging endeavor. This is true, in large part, to the onerous approval requirements imposed by the CC&Rs themselves. Indeed, many CC&Rs require a super-majority (i.e., 67% or more) of the HOA’s members to approve an amendment. Such requirements make it difficult for an association to pass a proposed amendment, often as a result of member apathy or lack of participation in the voting process.

When this occurs, California Civil Code Section 4275 provides a mechanism for a HOA to “petition the superior court of the county in which the common interest development is located for an order reducing the percentage of affirmative votes necessary for such an amendment.” Section 4275 thus serves to provide a HOA “with a safety valve for those situations where the need for a supermajority vote would hamstring the association.” (Blue Lagoon Community Assn. v. Mitchell (1997) 55 Cal.App.4th 472).

Accordingly, in order to successfully bring a petition to reduce the percentage of affirmative votes necessary to approve an amendment to the CC&Rs, a HOA must demonstrate the following:

Adequate notice of the proposed CC&R amendment was given;
Balloting was conducted properly pursuant to the CC&Rs and the Act;
Reasonable efforts were made to solicit approval from the members;
More than fifty percent (50%) of the eligible members voted in favor of the amendment;
“The amendment is reasonable[;]” and
“Granting the petition is not improper….”

(Cal. Civ. Code § 4275(c).)

In the recent case of Orchard Estate Homes, Inc. v. The Orchard Homeowner Alliance, the California Court of Appeal rejected an argument brought by a group of homeowners (The Orchard Homeowner Alliance) objecting to the HOA’s petition to reduce the percentage of affirmative votes necessary to amend their CC&Rs. ((2019) ___ Cal.App.4th ___, 2019 Cal.App.Lexis 144.) (“Orchard Estate”) In particular, and relying on the Mission Shores Assn v. Pheil case, the homeowners argued that, in order to prevail on their petition, the HOA must demonstrate that the CC&R amendment failed due to “voter apathy.” ((2008) 166 Cal.App.4th 789, 794-95 (stating that section 4275 of the California Civil Code was to “provide homeowners associations with the ‘ability to amend [their] governing documents when, because of voter apathy or other reasons, important amendments cannot be approved by the normal procedures”).)

The Court in Orchard Estate rejected this argument, noting that the statutory language contained in California Civil Code section 4275(c) clearly and unambiguously identified the “elements required to be established to authorize a reduction in the required voting percentage to amend a provision of the governing CC&Rs.” (Id. at p. **6-7.) As such, the Court was unwilling “to imply an element that was not expressed by the Legislature” based on off-hand statements made in appellate decisions. (Id. at p. *7.)

Although the Orchard Estate case appears to make CC&R amendments easier to accomplish, Board members should nevertheless be aware that amending CC&Rs can be an expensive endeavor. Therefore, it is important for Board members to discuss potential CC&R amendments with the HOA’s legal counsel to determine if they are necessary and/or advisable, or if other avenues are available to achieve the Board’s desired result.

-Blog post authored by TLG Attorney, Matthew T. Plaxton, Esq.

Architectural Variances Binding Future Owners

Published on: March 26, 2019 | by Steven J. Tinnelly, Esq.

*Asked & Answered

Asked – We are thinking about granting a variance to the Covenants of our Homeowner’s Association. The question is: would the Variance, if granted, apply to the next landowner (i.e., does the grant of a variance run with the land)?

Answered – A homeowners association’s (“HOA’s”) governing documents may permit the HOA to, under limited and extraordinary circumstances, issue a variance from compliance with one or more of the HOA’s architectural standards. Because the decision to grant a variance has been held to be analogous to the issuance of a zoning variance by an administrative agency, HOAs are limited to granting variances in unique and extraordinary circumstances where substantial evidence would justify the desired variance. (See e.g., Cohen v. Kite Hill Community Assn. (1983) 142 Cal.App.3d 642, 652, quoting Topanga Assn. For a Scenic Community v. County of Los Angeles (1974) 11 Cal.3d 506, 517-18.)

For example, and with respect to zoning variances, said variances are granted “only when, because of special circumstances applicable to the property, including size, shape, topography, location or surroundings, the strict application of the zoning ordinance deprives such property of privileges enjoyed by other property in the vicinity and under identical zoning classification.” (Cal. Govt. Code § 65906.) Thus, it is the unique nature of the land and its surroundings which would justify the issuance of a zoning variance, not necessarily the individual desires of the property owner.

Cases which have discussed variances in the context of a HOA have not addressed the issue of whether architectural variances are perpetual in nature (i.e., whether the grant of a variance runs with the land and binds future property owners). As such, and given the Court’s treatment of architectural variances as being analogous to the issuance of a zoning variance, it is important to examine the scope of a zoning variance to determine whether said variance applies individually to the owner of the property when the variance is issued, or if it applies to the property upon which the variance is given and therefore runs with the land.

In Cohn v. County Bd. Of Supervisors, the California Court of Appeal held that a variance from the general plan of zoning for use of property was “not personal to the owner at the time of the grant, but [was] available to any subsequent owner….” ((1955) 135 Cal.App.2d 180, 184, quoting 62 C.J.S. § 547 (now 66 C.J.S. § 472.) In other words, the variance runs with the land and binds future owners. (Id.) Accordingly, given the similar treatment of architectural variances to zoning variances, it is reasonable to conclude that such architectural variances are not personal to the owner at the time of issuance by the HOA, but runs with the land and binds future owners of the property.

In light of the binding nature of architectural variances, there may be circumstances where it would be prudent for the HOA to document such variance through a recorded agreement or covenant. This is particularly important where the HOA’s approval is conditioned upon continued action by the property owners (e.g., maintenance and indemnification). Moreover, although the property owner would have an affirmative obligation to disclose the existence of any variance granted and/or any obligations imposed by the Association in connection therewith (see generally, Kovich v. Paseo Del Mar Homeowners’ Assn. (1996) 41 Cal.App.4th 863), a recorded agreement is the most dependable way of ensuring that future owners are on notice of the existence of the agreement and they assume upon purchase.

Board members must be cautious when granting variances to architectural standards, doing so only where extraordinary circumstances warrant. When a variance is granted, the Board should ensure that any conditions imposed on such approval is clearly stated in the Board’s decision, and, in some circumstances, documented in a recorded agreement. Accordingly, the foregoing highlight’s the importance of involving the HOA’s legal counsel to guide the Board in determining whether a variance should be documented by way of a recorded agreement.

-Blog post authored by TLG Attorney, Matthew T. Plaxton, Esq.

Recent California Court of Appeal Ruling Limits Anti-SLAPP Protection for Actions by Board of Directors

Published on: February 13, 2019 | by Steven J. Tinnelly, Esq.

*Unpublished Opinion

The recent unpublished opinion of Chemers v. Quail Hill Community Association et al. (2018) shines some light on the oft-misunderstood California Anti-SLAPP statute and its effectiveness as a defense for actions by a homeowners association’s board of directors. The Fourth District California Court of Appeal held that certain actions by the board in a dispute with a director were not in furtherance of the right of free speech or petition as to be protected by the anti-SLAPP statute.

Plaintiff Evan Chemers (“Chemers”) was a member of the board of directors for defendant Quail Hill Community Association (“Quail Hill”), a planned unit development located in Irvine, California. A series of disagreements and escalating tension between Chemers and other members of the board resulted in the board taking affirmative steps to remove Chemers from the board permanently. In June 2016, the board proposed a resolution to create an executive committee consisting of all board members except for Chemers, and in July 2016, the board proposed a resolution to declare Chemers’ board seat vacant on the ground that he did not meet the member-residency requirement. Chemers was not afforded an opportunity to present any evidence of residency, address the board, or have his legal counsel present when he was formally removed.

In October 2016, Chemers filed a lawsuit against the association and other directors, alleging eight causes of action including breach of governing documents, breach of fiduciary duty, negligence, declaratory relief, and various violations of the Civil Code and Corporations Code. In response, the defendants filed an anti-SLAPP motion seeking an order striking the complaint and the eight causes of action within it. The trial court granted the moving defendants’ anti-SLAPP motion as to six of the eight causes of action.

Chemers subsequently appealed the trial court’s decision, and the Court of Appeal concluded that the trial court erred by granting the anti-SLAPP motion as to the claims alleged against Quail Hill for breach of contract, violation of Civil Code section 5850 et seq., and for two counts of declaratory relief. The Court of Appeal reasoned that none of those four causes of action arose out of protected activity – whether speech or petitioning activity – within the meaning of the anti-SLAPP statute.

Independent Contractors vs. Employees

Published on: December 18, 2018 | by Steven J. Tinnelly, Esq.

employee-vs-contractor In the recent case of Dynamex Operations West, Inc. v. Superior Court, the California Supreme Court set forth a new test that employers should utilize to determine whether their workers are appropriately classified as independent contractors or employees. (Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal. 5th 903.) The new test will likely have a significant impact on the obligations and liabilities of employers for matters involving payroll taxes, worker’s compensation insurance, IRS reporting, and minimum wage and overtime requirements. In light of the Dynamex decision, all California employers, like homeowners associations, should re-evaluate whether they have appropriately classified their third-party vendors as independent contractors.

The Supreme Court simplified the test that was previously used to classify workers. Prior to the decision in Dynamex, a multi-factor test was utilized. The principal factor was whether the employer had the right to control the manner and means in which work was performed. However, the courts also considered several other secondary factors, such as whether the employer could discharge the worker at will; the level of skill required to perform the work; whether the employer supplied the tools and location to work; the length of time to be worked; the method of payment (whether by time or by job); whether the worker usually performed this type of work; and the subjective beliefs of both parties. This “totality of the circumstances” test created a substantial amount of uncertainty among employers.

The new Dynamex test, referred to as the “ABC Test,” makes is easier for employers to determine in advance whether their workers should be classified as employees or independent contractors. Although the new test is easier to utilize, employers will now find that it is more difficult to classify their workers as independent contractors. The ABC Test begins with the presumption that all workers are employees. To classify a worker as an independent contractor, the employer bears the burden of proving three elements.

First, the worker must be free from the employer’s control and direction, both in actuality and in contract. This prong is essentially a restatement of the principal factor in the pre-Dynamex test, which requires genuine independent contractors to control the manner and means in which they perform their own work.

Second, the worker must perform work for the employer that is outside of the employer’s usual course of business. For example, a homeowners association would likely be able to satisfy Part B, when dealing with workers hired to perform janitorial or landscaping services. This is because homeowners associations are not in the janitorial or landscaping business; rather, homeowners associations are in the business of managing and maintaining Common Interest Developments.

Third, the worker must be customarily engaged in an independently established trade, occupation, or business of the same nature of work performed for the employer. Using the example from above, a homeowners association could satisfy Part C of the test, if it could show that its janitor or landscaper provides the same janitorial or landscaping services for other homeowners association as well. True independent contractors have their own business cards, a separate place of business, and their own book of clients.

It is important to note that the Supreme Court specifically limited its Dynamex holding to disputes involving Wage Orders issued by the Industrial Welfare Commission. In order words, the case’s holding should only be applied to lawsuits that allege violations of Wage Orders (i.e., involving meal and rest breaks and overtime wages). At this point, it is uncertain whether the new ABC Test will be applied to all other legal claims brought against employers. Nonetheless, homeowners associations that routinely hire independent contractors should carefully re-evaluate their hiring procedures to ensure that their workers are properly classified under the ABC Test.

-Blog post authored by TLG Attorney, Sarah A. Kyriakedes, Esq.

Regulation of Noisy Vehicles within the Community

Published on: October 16, 2018 | by Steven J. Tinnelly, Esq.

*Asked & Answered

Asked – We have several vehicles that are “extremely loud” due to their exhaust systems. Even with all windows and doors closed and these vehicles 1/2 way across the complex, there is NO PROBLEM hearing them when they start them. They even set off car alarms near them. Can we ask them to address the noise they cause?

Answered – Noisy neighbors are a frequent occurrence in common interest developments, especially in dense housing communities (e.g., condominiums). And while the California Supreme Court has indicated that individuals “in a community must put up with a certain amount of annoyance, inconvenience and interference,” (San Diego Gas & Electric Co. v. Superior Court (1996) 13 Cal.4th 893, 937), that does not extend to situations which have a substantial impact on residents’ use and enjoyment of their separate interests.

Indeed, residents of a common interest development are generally entitled to the peaceful use and enjoyment of their respective separate interests as well as the common areas. Ensuring such peaceful use and enjoyment is what underlies many of the provisions set forth in an association’s recorded Declaration of Covenants, Conditions and Restrictions (“CC&Rs”). Residents purchase or rent their separate interests within an association in reliance on those restrictions being consistently and faithfully enforced.

The peaceful use and enjoyment to which residents are entitled is typically reflected in the association’s CC&Rs under the heading “use restrictions.” The following is a common example of a use restriction preserving the right of residents to the peaceful use and enjoyment of their separate interest:

No Condominium shall be used in such a manner as to obstruct or interfere with the enjoyment of occupants of other Condominiums or annoy them by unreasonable noises or otherwise, nor shall any nuisance be committed or permitted to occur in any Condominium.

This provision, alone, can serve as a basis to prevent residents from operating vehicles in the community that are “extremely loud.” However, some associations go a step further and adopt operating rules identifying what constitutes an “unreasonable” noise. For example, an association may adopt an operating rule prohibiting residents from operating vehicles that exceed a certain decibel level; or, more commonly, adopt an operating rule prohibiting residents from operating vehicles that produce “excessive” noise thereby providing the Board of Directors with the broad discretion to determine what constitutes “excessive.”

In sum, the ability to regulate conduct or activities that constitute a nuisance is well within the scope of authority granted to an association. This power extends to prohibiting residents from operating extremely loud vehicles within the community. Associations facing such issues can and should commence enforcement efforts to remedy the violation, and, if the association has not done so already, adopt operating rules addressing such conduct.

Content provided by TLG attorney Matthew T. Plaxton, Esq.

To submit questions to the HOA attorneys at Tinnelly Law Group, click here.

SB 261 Signed! Changes to Individual and General Notice

Published on: September 27, 2018 | by Steven J. Tinnelly, Esq.

**New Legislation

Homeowners associations are often required to disclose information to their membership. There are two forms of disclosure: general notice or individual delivery. When homeowners associations are required to deliver documents by “individual delivery” or “individual notice,” Civil Code Section 4040 permits delivery by email, facsimile, or other electronic means (“electronic delivery”) only if the recipient has consented in writing to the same. Civil Code Section 4040 also requires recipients to revoke their consent to electronic delivery in writing. SB 261 allows recipients to consent to electronic delivery and to revoke consent to electronic delivery by email. This Bill will bring the current law up-to-date with existing technology so that homeowners can easily opt in or out of electronic delivery.

Civil Code 4360 requires the Board Directors to provide general notice of a proposed rule change at least thirty (30) days before making the change to the rule. SB 261 changes that timeframe from thirty (30) days to twenty-eight (28) days. Under the new statute, the Board of Directors would be required to provide general notice of a proposed rule change at least twenty-eight (28) days before making a rule change.

SB 261 is an example of the law evolving with technological advances. Although “snail mail” is not quite obsolete, more and more people rely on their inboxes for important news and updates. By permitting Homeowners to opt into electronic delivery with emails, HOAs should be able to more quickly and efficiently provide individual notice to their Members.

-Blog post authored by TLG Attorney, Sarah A. Kyriakedes, Esq.

AB 2912 Signed! Significant Changes to HOA Financial Review and Insurance Requirements

Published on: September 20, 2018 | by Steven J. Tinnelly, Esq.

*New Legislation

Earlier this year, the California Legislature proposed AB 2912 (Irwin) in an effort “to protect owners in a [HOA] from fraudulent activity by those entrusted with the management of the [HOA’s] finances.” To that end, AB 2912 significantly increases the financial review requirements of HOA boards of directors, limits the ability for automatic transfer of funds without board approval, and also imposes a requirement for the HOA to purchase and maintain a fidelity bond. AB 2912 was signed on September 17, 2018 and its changes to the law take effect January 1, 2019. The following information summarizes the new state of the law in the wake of AB 2912’s passage:

Requirement for Written Board Approval of Account Transfers Above $10k:

Existing Civil Code § 5380 has been amended to prohibit the automatic/electronic transfer of funds greater than $10,000 or 5% of a HOA’s total combined reserve and operating account deposits (whichever is lower), without prior, written approval from the HOA’s board of directors. This requirement is also reiterated in new Civil Code § 5502. HOA boards that previously gave blanket consent to their managing agent for such electronic/automatic transfers should expect the need to now give written approval for such transfers (i.e., large payments to vendors of the HOA) each time a transfer is required.

Financial Review by Board Must Now be Performed on a Monthly Basis:

The law previously required the Board to review the financial information of the HOA on at least a quarterly basis. Civil Code § 5500 has been amended to now require that review to be performed on a monthly basis. Moreover, it now requires the review to include the HOA’s check register, monthly general ledger, and delinquent assessment receivable reports.

But what about HOA Boards that only meet quarterly? Fortunately, new Section 5501 was added to the Civil Code to address this issue. It provides that the financial review requirements may be met “when every individual member of the board, or a subcommittee of the board consisting of the treasurer and at least one other board member” reviews the financial information “independent of a board meeting” and that review is (a) subsequently ratified by the board at its next meeting and (b) the ratification is memorialized in the board’s meeting minutes. For HOAs that meet on a quarterly basis, there will likely be a need to form an executive finance committee of the board as contemplated by Section 5501. Such HOAs should work with their legal counsel to draft an appropriate charter for such a committee.

HOAs Now Legally Required to Purchase a Fidelity Bond:

A fidelity bond is a form of insurance protection which covers losses that the policyholder incurs as a result of fraudulent acts by individuals. It is used by a HOA to insure losses caused by the dishonest acts of the association’s employees, managers, board members or officers. Previously there was no legal requirement for HOAs to purchase fidelity bonds; however, many HOAs do so either because their CC&Rs require it and/or because it makes good business sense.

New Section 5806 is added to the Civil Code to formally require HOAs to purchase a fidelity bond. Unless a HOA’s governing documents require greater coverage amounts, the fidelity bond must be purchased and maintained in a coverage amount that is equal to or more than the combined amount of reserves of the HOA and total assessments for three (3) months. The bond must also include computer fraud and funds transfer fraud. Additionally, for HOAs that contract with a third-party managing agent or management company (which is the vast majority of HOAs in California), the HOA’s fidelity bond coverage must also include coverage for dishonest acts by the managing agent or the management company and its employees.

HOA boards should work with their managing agents to develop a protocol for adhering to the new legal requirements regarding automatic transfers of funds and monthly financial reviews. Additionally, HOAs should contact their insurance professionals to ensure that they are carrying fidelity bond coverage which satisfies the new legal requirements.