BILL ANALYSIS Ó
AB 771
Page 1
Date of Hearing: May 3, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 771 (Butler) - As Amended: April 25, 2011
As Proposed to Be Amended
SUBJECT : Common Interest Developments: document Request Fees
key issueS :
1)Should A third Party that contracts with a home owners'
association to provide documents to association members be
subject to the same requirements and fee limits that are
imposed on the association?
2)Should the owner seeking to sell his or her separate interest
in a Community Interest development be required to provide a
prospective buyer of that interest with copies of minutes of
the associations board of director meetings?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
Existing law requires the owner of a separate interest in a
Community Interest Development (CID) to provide a prospective
buyer of that interest with several documents (often called
"1368 documents" for the Code section that requires them)
relating to the operation of the home owners' association (HOA).
Existing law also requires that a HOA provide these documents
to the owner-seller within 10 days of a request, and limits any
fees that the HOA may charge to the owner to the amount of the
"actual cost" of providing the documents. This bill seeks to
clarify that any requirements imposed on the HOA regarding the
provision of "1368" documents applies equally to any person or
entity with whom the HOA contracts to perform that service.
Under this bill, both the HOA and the third party contractor
could only charge "reasonable" fees and cannot "bundle" those
fees with other fees, fines, or assessments. The bill would
also impose certain disclosure requirements on both HOAs and
owners when the latter sell their separate interest in the CID.
The sponsor, California Association of Realtors (CAR), believes
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that this measure will provide greater transparency and ensure
that companies employed by an HOA do not circumvent legal
requirements relating to document production. The California
Association of Community Manager (CACM) opposed this bill when
it was heard last week in the Assembly Housing and Community
Development Committee (H&CD) on the grounds that some of the new
document and disclosure requirements will result in added costs
for owners, HOAs, and managers alike. However it appears that
amendments agreed to in H&CD Committee and additional amendments
to be taken today in this Committee address most, if not all, of
CACM's concerns. The following analysis reflects these
amendments. This bill passed out of the H&CD Committee on a 7-0
vote.
SUMMARY : Requires a home owners' association (HOA) to provide
certain forms and fee estimates to members relating to document
production fees, and provides that third parties who contract
with an HOA to provide document production services are subject
to the same standards to which the HOA would be subject if it
were providing the documents directly to its members.
Specifically, this bill :
1)Requires the seller of a separate interest in a common
interest development (CID) to provide to a prospective buyer
with a copy of the minutes of the regular HOA board of
directors meetings for the past year, in addition to the
documents already required under existing law.
2)Requires the HOA, upon written request, to provide the owner
with a copy of specified requested documents within 10 days.
In addition, upon written request, the HOA shall provide a
written or electronic estimate of the fees that will assessed
for providing the requested documents. Specifies that
requesting parties shall have the option of receiving the
documents by electronic transmissions if the association
maintains the documents in electronic form.
3)Permits the HOA to collect a reasonable fee for the
procurement, preparation, reproduction, and delivery of the
documents requested, but provides that no additional fees may
be charged by the association for electronic delivery of the
document requested.
4)Provides that document fees permitted above shall be
distinguished from (i.e., not "bundled" with) other fees,
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fines, or assessments billed as part of a transfer or sales
transaction. Specifies that documents shall not be
conditioned upon, or required to be combined with, any other
documents, items, or services.
5)Permits the HOA to contract with any person or entity to
facilitate compliance with the requirements of this
subdivision on behalf of the association, provided that the
person or entity is subject to the requirements that would be
imposed upon the HOA if the HOA provided the services
directly.
EXISTING LAW :
1)Requires the seller of a separate interest in a CID to provide
specified documents to a prospective purchaser of that
interest. (Civil Code Section 1368 (a).)
2)Requires an HOA to provide the above documents to the owner
within 10 days of the mailing or delivery of the request and
limits the amount of fees charged for the provision of the
documents to the HOA's actual costs for procuring, preparing,
and reproducing the requested documents. (Civil Code Section
1368 (b).)
3)Provides that an HOA may not impose any fee or assessment in
connection with the transfer of title that exceeds the
association's actual costs to change its records or any costs
associated with the transfer. (Civil Code Section 1368 (c).)
4)Holds, pursuant to case law, that the above fee limitations do
not constrain the amount that an HOA's managing agent can
charge for the procurement, preparation, or reproduction of
requested documents. (Berryman v. Merit Property Management,
Inc. 152 Cal. App. 4th 1544, 1552.)
COMMENTS : The nearly 50,000 common interest developments (CIDs)
in California vary in size and structure, but are generally
multi-unit communities characterized by the following: (1)
separate ownership of individual residential units coupled with
an undivided interest in common property; (2) covenants,
conditions, and restrictions (CC&Rs) that limit the use of both
separate interests and common property; and (3) management of
common property and enforcement of restrictions by a home
owner's association (HOA). The Legislature regularly hears
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bills seeking to regulate the relations (and conflicts) between
separate interest owners, on the one hand, and the HOA, on the
other. This bill falls into that category.
Under existing law, when an owner of a separate interest in a
CID wishes to sell that interest, he or she must provide a
prospective buyer with several documents (called "1368
documents" for the Civil Code section that requires them)
relating to restrictions, regular and special fees and
assessments, and the overall governance of the development by
the HOA. Existing law also requires the HOA, upon request, to
provide these documents to a separate interest owner within 10
days. Any fees that the HOA charges for providing these
documents must not exceed actual cost. In addition to the
required "1368" documents, existing law also requires the HOA to
provide all members with various financial documents - so-called
"1365" documents, named for the section number that requires
them - on an annual basis.
Seeking to provide more transparency and consistency in document
fees, this bill would amend the above requirements in several
ways. First, this bill would add to the list of documents that
a seller of a separate interest must provide to a prospective
buyer a copy of the HOA's "regular" board minutes for the
previous 12 months. (The bill will not apply, as proposed to be
amended, to closed "executive session" meetings.) Second, the
bill would permit an owner to choose between written or
electronic forms of the documents, if the HOA maintains
documents in electronic forms. Third, the bill would permit the
HOA to charge a "reasonable fee" for the preparation,
production, and delivery of documents (as opposed to the "actual
cost" limit imposed by existing law). Fourth, the bill would
require that document fees would be distinguished from any other
fees, fines, or assessments to prevent "bundling" of fees, which
can obscure the amount of fees attributed directly to document
production. Finally, the bill would provide that any
requirements or fee limitations that are imposed on the HOA also
apply to management company or any other person or entity that
the HOA contracts with to provide the required documents.
Berryman v. Merit Property Management, Inc . According to the
author and sponsor, this bill as introduced was primarily
conceived of as response to a decision by a California Court of
Appeal holding that existing timing requirements and fee
limitations set forth in Civil Code Section 1368 only applied to
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the HOA, but not to a management company or other third party
agent that the HOA might employ to provide document productions
services. (Berryman v. Merit Property Management, Inc. (2007)
152 Cal. App. 4th 1544, 1552.) The author and sponsor contend
that in enacting Section 1368 the Legislature intended to ensure
an owner's right to obtain required documents at a known and
reasonable fee, and therefore the requirements should apply to
any party that provided those documents to the owner, whether it
was the HOA or the HOA's management company. However, as noted,
this bill also goes well beyond this issue to create new and
additional disclosure requirements that seek to provide greater
transparency for both separate interest owners and prospective
buyers.
"Actual Cost" vs. "Reasonable Fees. " This bill would change the
limit on fees that an HOA can charge for providing required
documents from the "actual cost" of providing documents to a
"reasonable fee" for providing the documents. Although
Committee queries on this change had not been fully answered at
the time of this writing, it appears that that this change was
made in response to an initial objection raised by management
companies that restricting fees to "actual cost" might be
appropriate for a non-profit HOA, but not for a for-profit
management company that contracts with the HOA to provide these
services. Presumably, this change would permit a management
company to make a "reasonable" profit for providing the
documents. It is less clear how the change from "actual cost"
to "reasonable fee" will affect the charges that an HOA could
impose for document production when it provides this service
directly.
Amendments Appear to Address Most But Not All Opposition
Concerns . Earlier versions of this bill would have required the
HOA to provide all members with statement and disclosure form
detailing the document production fees that could be charged to
an owner trying to sell his or her separate interest. Opponents
- in particular the California Association of Management
Communities (CACM) - argued that requiring the HOA to provide
all members with such documents was inefficient and unnecessary
given that only a small proportion of the owners would be
selling at any given time. In addition, opponents noted that
the bill already requires fee estimates and a disclosure form be
provided to an owner upon request. The author has agreed to
remove the requirement that the HOA provide all members with a
fee statement and has taken other minor and technical amendments
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that address most, but not all, of CACM's concerns.
Should an owner of a separate interest be required to provide a
prospective buyer with minutes of the regular board of director
meetings? As noted above, existing law requires the seller of a
separate interest to provide a prospective buyer of that
interest with a list of documents pertaining to the operation
and financial status of the HOA - the so-called "1368"
documents. This bill would add to this list of required
documents a copy of the most recent 12 months of minutes of the
regular meetings of the HOA's board of directors. CACM claims
that this new requirement is unnecessary and may even present
privacy concerns. In addition, CACM claims that this
information can be, and often is, provided upon request as a
matter of request. However, as the author and sponsor point
out, lenders sometimes require this information and the
California Association of Realtors standard "Residential
Purchase Agreement" already requests this information. Thus the
Committee may wish to explore with the author and sponsor
whether it is necessary to effectively codify this apparent
industry practice by adding the minutes to the list of required
"1368" documents, or if the matter should be left, as it
apparently is now, to a private agreement between buyer and
seller.
ARGUMENTS IN SUPPORT : According to the author and sponsor, this
bill will allow an HOA to continue contracting with a management
company to provide required documents, while at the same time
providing greater transparency to both the seller and the
prospective buyer. Most important, the author and sponsor
contend, this bill will clarify (the Berryman opinion
notwithstanding) a Legislative intent that the timing and fee
requirements set forth in Civil Code Section 1368 should apply
to both the HOA and any party with which the HOA contracts to
provide documents to the owner.
ARGUMENTS IN OPPOSITION : In its letter of opposition to the
Committee, the California Association of Community Managers
(CACM) points first and foremost to the requirement that the HOA
to provide all owners with a prescribed disclosure form and a
statement describing fees charged for preparing, providing, and
delivering Section 1368 documents. As noted, this objection
appears to be addressed by the amendment that the author will
take in this Committee. However, CACM also opposes the
provision of this bill that would require the seller of a
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separate interest to provide to the prospective buyer with
minutes of the board of directors meetings for the past 12
months. CACM notes that minutes have never been required under
either Section 1365 or Section 1368. Moreover, CACM asks,
"Since the owner already has the ability to obtain these at any
time, why add the burden and additional costs to the seller?"
At CACM's request, one of the amendments that the author has
agreed to take today will specify that the minutes provided
should only be those of the "regular" board of director meetings
that are open to all members, but not to the minutes of the
closed "executive session" meetings. (Indeed, based on the
Committee's discussions with various stakeholders, it is not
even clear if minutes are even taken in the executive session
meetings.)
Proposed Author Amendments : The author wishes to take the
following amendments in this Committee. These amendments are
reflected in the above analysis. Amendments 2, 4, 5, 6 & 7 were
committed to in the H&CD Committee. Amendments 1 and 3 are
added by this Committee with the approval of the author.
Amendment 1
Delete pages 3 through 6 and, on page 7, delete lines 1 through
13
Amendment 2
On page 7 line 14 change "SEC. 2" to "SEC. 1"
Amendment 3
On page 8 line 33 before "meetings" insert: regular
Amendment 4
On page 9, lines 12 and 13, strike out "or the association's
agent"
Amendment 5
On page 11, strike out lines 29 through 31
Amendment 6
AB 771
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On page 11 line 33 change "SEC. 3" to "SEC. 2"
Amendment 7
On page 12, line 10 after "Column" insert or Columns
REGISTERED SUPPORT / OPPOSITION :
Support
California Association of Realtors (sponsor)
Opposition
California Association of Management Communities
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334