BILL ANALYSIS Ó
AB 1838
Page 1
Date of Hearing: May 1, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 1838 (Calderon) - As Amended: April 26, 2012
SUBJECT : Common Interest Developments: Association Records
KEY ISSUE : Should changes be made to a law that regulates the
fees that a homeowners association may charge for providing
certain documents to homeowners, or should a recently enacted
statute addressing these same issues be given time to work?
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 the HOA to make these documents
available to the owner-seller within 10 days of a request, and
it limits the fees that the HOA may charge to the owner to the
amount of the "actual cost" of preparing or procuring the
documents. Because HOAs often contract with a management
company to provide these documents, in the past there has been
some ambiguity about whether the management company must meet
the same requirements imposed on the HOA as to the cost and
provision of documents. Last year, this Committee heard AB 771
(Chapter206, Statutes of 2011), a bill that attempted to address
this issue. After extensive negotiations and several subsequent
amendments, AB 771 - which never received a negative Committee
or floor vote - expressly authorized an HOA to contract with a
third party to provide the required documents, and that it could
charge a "reasonable fee" to cover the costs of "procuring" the
documents. In other words, the cost of hiring a third party
would be considered part of the HOA's "actual cost." The
legislation made several other changes intended to make the cost
of documents more transparent, including a prohibition against
"bundling" document fees with other fees and a requirement that
fees be detailed in a specified form. This bill requires that
the form be in at least 10-point font, imposes limitations on
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the ability of an HOA to collect cancellation fees if the sale
does not occur, and makes other changes apparently intended to
clarify the language of last year's AB 771. However, many of
the stakeholders who were involved in working out the language
of AB 771 either oppose this bill or have expressed concerns to
the Committee. Not all stakeholders agree that the bill is
necessary and find the proposed "clarifications" more confusing
than clarifying. Despite last minute efforts to reach a
consensus on language, the stakeholders remain divided about the
need for the bill and content of the proposed changes.
SUMMARY : Makes several relatively minor changes to an existing
statute that requires certain documents to be provided to a
prospective purchaser of a separate interest within a Community
Interest Development (CID). Specifically, this bill :
1)Provides that an existing, required disclosure form that
identifies the fees that will be charged for the production of
certain documents relating to a homeowners association (HOA)
must be in at least 10-point font.
2)Prohibits an HOA from charging a cancelation fee for providing
certain documents if (a) the request was canceled in writing
by the same party that placed the order and the work has not
been performed; or (b) the request was canceled in writing and
the work that had been performed on the order was compensated.
3)Makes several other intended clarifying changes to existing
law relating to document fees.
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, upon written request, to provide the above
documents to the owner of a separate interest, or any other
recipient authorized by the owner, within 10 days of the
mailing or delivery of the request. Requires an HOA, also
upon request, to provide the owner or recipient with a
prescribed form that contains a written or electronic estimate
of the fees that will be assessed for providing the requested
documents. (Civil Code Section 1368 (b) (1).)
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3)Permits the HOA to collect a reasonable fee based upon the
HOA's actual costs for procuring, preparing, reproducing, and
delivering the requested documents. Specifies that no
additional fees may be charged by the HOA for the electronic
delivery of the documents requested. (Civil Code Section 1368
(b) (1)-(2).)
4)Requires that any fees charged for the above documents shall
be distinguished from other fees, fines, or assessments billed
as part of the transfer or sales transaction. Specifies that
delivery of the required documents shall not be withheld for
any reason or subject to any condition except payment of the
fee. (Civil Code Section 1368 (b)(3).)
5)Permits an HOA to contract with any person or entity to
facilitate compliance with the above requirements on behalf of
the HOA. (Civil Code Section 1368 (b)(4).)
6)Prescribes a statutory billing disclosure form that lists the
charges for each of the required documents. Requires that
this form be provided, upon receipt of a written request, to
the requester or designated recipient in order to provide an
estimate of the fees that will be assessed for providing the
requested documents. Requires the HOA to also provide a
recipient of the documents with a completed form at the time
the required documents are delivered. (Civil Code Section
1368.2 and 1368 (b) (1) and (5).)
7)Prohibits an HOA from imposing any fee or assessment in
connection with the transfer of title that exceeds the
association's actual costs to change its records or that is
otherwise authorized by law. (Civil Code Section 1368 (c).)
8)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,
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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).
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).
These documents cover everything from fees and regulations to
the overall governance of the CID. Existing law also requires
the HOA, upon request, to provide these documents to the
separate interest owner, or any other recipient authorized by
the owner (most likely the prospective buyer) within 10 days.
HOAs are permitted to charge a reasonable fee for these
documents based on the actual cost of procuring, preparing,
copying, or delivering the documents. Existing law also
requires that a prescribed disclosure form, setting forth the
charges for each required document, be provided to the
requesting party. Existing law also requires that the HOA
provide this form to the recipient designated by the owner at
the time that the required documents are delivered.
Although the fees charged for production and delivery of
documents varies, they typically range from $75 to $250,
especially when provided directly by the HOA. During last
year's debates and discussions on AB 771, discussed below, some
stakeholders claimed that these fees could reach as high as
$1000, but it was not entirely clear whether these higher
amounts included document fees only or if the documents fees
were "bundled" with other fees relating to the transfer of
title. At any rate, the cost is not insignificant, and sellers
and buyers of separate interests within a CID understandably
want to know what they are paying for, and HOAs understandably
need to know what documents they are required to provide, when
they must provide them, and how much they can charge for them.
Although existing law requires the seller of a separate interest
to provide the documents to the prospective buyer - and requires
the HOA to provide those documents when requested - whether the
seller or buyer ultimately pays the costs is something that may
be negotiated, as is not uncommonly done with any other closing
costs.
Last Year's AB 771 and the Obligations of Managing Agents : Last
year, this Committee heard AB 771 (Chapter 206, Statutes of
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2011). That bill primarily addressed a problem that is created
when an HOA relies upon a third party management company to
provide and deliver the required documents. Because the boards
of HOAs are typically filled by volunteer homeowners who may
have little or no management experience, HOAs often hire
management companies to handle certain administrative and
operational duties, just as they might hire third party
contractors to perform maintenance or landscaping work in common
areas. However, when a third party management company provides
the required 1368 documents, the question arises as to whether
the management company is subject to the same requirements and
restrictions that the law imposed on the HOA. In particular,
until AB 771, it was unclear if a management company was
required to provide the documents at "actual cost." Management
companies, after all, do not provide their services for free,
and if they were only permitted to charge the "actual cost" they
could not make a profit. On the other hand, then-existing law
created a presumption, to some, that homeowners were entitled to
receive the documents "at cost." Whether or not a management
company is required to provide the documents "at cost" raises a
larger question: to what extent are management companies, when
they perform tasks on behalf of the HOA, required to comply with
other restrictions and obligations imposed on the HOA? The
courts have generally held that the Davis-Stirling CID Act
regulates the relationship between the HOA and the owners, and
their respective rights and obligations toward each other; it
does not regulate a third party managing agent. Indeed, as to
the 1368 documents at issue here, a California appellate court
held that the fee limitations do not constrain the amount that
an HOA's managing agent can charge for the requested documents.
(Berryman v. Merit Property Management, Inc. 152 Cal. App. 4th
1544, 1552.)
In an effort to reach a compromise that would allow HOAs to use
a management company while still ensuring that sellers and
buyers could obtain documents for a reasonable fee, last year's
AB 771 did two things: (1) it expressly authorized an HOA to
contract with a third party to provide the documents; and (2) it
amended the existing "actual cost" limitation to make it clear
that "actual cost" included the "procurement" and "delivery" of
the document. In other words, the HOAs "actual cost" included
what it had to pay to the managing agent to procure and deliver
the documents. "Actual cost" was not limited to what it cost
the HOA to retrieve and photocopy the documents. In addition,
to these changes, AB 771 made a number of other changes that
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were designed to make the document fees more transparent: it
required the HOA to provide the seller with a written or
electronic estimate of the fees that would be charged for the
documents, and it created a prescribed disclosure form detailing
the document fees.
Changes Proposed by this Bill: This bill seeks to make a number
of additional changes that, according to the author and sponsor,
are intended to clarify and strengthen the AB 771 provisions.
As discussed below, only two of the changes proposed by this
bill appear to change existing law. The other changes are
intended to remove alleged ambiguities either created or left
unaddressed by AB 771. But it appears, based on a stream of
communications between the various stakeholders and Committee
staff, that the other changes proposed by this bill may create
more ambiguity than they eliminate.
Changes to Required Disclosure Form : As noted above, AB 771
created a prescribed disclosure form that detailed the charges
for the required documents. This bill would require that the
document be printed in at least 10-point font.
Prohibition on Cancellation Fees : Although AB 771 was silent on
the issue of whether or not an HOA could charge a "cancellation
fee" in the event that a seller cancelled the document request,
presumably because the planned sale for which the documents were
required fell through. Although nothing in existing law, and
certainly nothing in AB 771, appears to authorize such
cancellation fees, neither does it expressly prohibit them.
This bill would prohibit an HOA from charging cancellation fees
if (1) the request is cancelled before any work is already
performed; or (2) if work was performed but otherwise
compensated. It is not clear whether any HOA has charged
cancellation fees where no work was yet performed or tried to
collect for work that had already been compensated. But if any
have, or if any are thinking about it, this bill would prohibit
it.
"Clarifying" Changes : In addition to the two substantive
provisions noted above, this bill proposes several minor changes
to the language of Civil Code Section 1368 (the section covering
document requests and fees), most of which alter language agreed
to by various stakeholders on the long and winding road to
chaptering AB 771. The sponsor contends that these changes will
provide "important and necessary changes" that respond to "a
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number of issues" that have arisen since AB 771 went into
effect. However, it is not entirely clear to the Committee
staff or to the stakeholders who worked on AB 771 just what
those "issues" are or how the changes in wording proposed by
this bill will help. Indeed, some stakeholders even think that
the changes will make things less clear. A few examples
illustrate the problem:
- Existing law says that the owner-seller of a separate
interest must "provide" the required documents to the
prospective buyer. This bill says that the owner must
"disclose" the documents the buyer. The explanation
provided by the sponsor is that "One does not 'provide'
documents one 'discloses' documents to the buyer." ECHO,
the Executive Council of Homeowners, informs the Committee
that documents are actually physically "provided" to other
party; they are not merely "disclosed" to the other party.
- Existing law, as noted above, says that the owner-seller
of the separate interest must "provide" the required
documents to the prospective buyer. This bill would say
that the owner must "procure and prepare" the documents and
then, of course, "disclose" them to the prospective
purchaser. It is not at all obvious how this language
provides any more clarity as to what the owner is supposed
to do. Obviously, the owner-seller must somehow "procure
or prepare" the documents before providing or disclosing
them to the prospective buyer. The sponsor claims that
this will make it clear that the seller can "procure and
prepare" all of the documents without having to rely upon
the HOA or any other party to provide the document. But it
is unclear to the Committee or other stakeholders how the
proposed change would accomplish that. Nothing in existing
law - which merely says the owner-seller must provide the
documents to the prospective buyer - suggests that the
owner-seller must obtain the documents from the HOA if the
owner-seller is already in possession of those documents.
Obviously if the owner-seller is not in possession of the
documents, then he or she will probably need to obtain them
from the HOA. (The bill in print appears to strike "obtain
from the association" and replace it with "procure and
prepare," which might at first glance comport with the
sponsor's reasoning, but only if "obtain from the
association" had been in existing law. But it was not;
that language was added in a prior version of the bill.)
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- Existing law, as amended by AB 771, says that an HOA
may contract with a person to "facilitate compliance with
the requirements of this subdivision on behalf of the
association." This bill would say that the HOA may
contract with a person to "facilitate the requirements of
this section and any other tasks associated with the
transfer of title." The sponsor says that this is
necessary because there are other duties associated with
transfer of title, including charging for "keys to
mailboxes, tennis courts, pool facilities" and so on.
While this is true, and while an HOA may be required to do
these things when a separate interest changes hands, it is
not clear how this has anything to do with providing the
1368 documents and the fees that may be charged for doing
so. The existing law wisely only references this
"subdivision" because only subdivision (b) of Section 1368
deals with the HOA's role in providing and charging for the
documents. Subdivision (a) of this section merely lists
the kinds of documents that the seller must provide to the
prospective buyer; it does not speak to the HOAs role in
providing those documents to the owner or other intended
recipient of the documents.
Additional examples could be cited. But the above examples
appear to justify concerns raised by the opponents, and other
stakeholders who have expressed concern, that most of the
provisions of this bill may create more ambiguities than it
eliminates. At any rate, it is not entirely clear to the
Committee what problems many of the proposed changes seek to
address, much less how the proposed changes would actually
resolve those problems to the extent that they do exist.
Proposed Committee Amendments : In light of the above, the
Committee may wish to recommend that the author limit the bill
to the two substantive provisions that actually add to existing
law and eliminate all other proposed changes to existing law.
Specifically, the following two provisions could be retained:
(1) the provision specifying that the required disclosure form
be in at least 10-point font (Page 7 lines 9-10); and (2) the
provision prohibiting cancellation fees if no work is performed
or, if performed, otherwise compensated. (Page 4 lines 31-37.)
Except for those two provisions, the Committee may recommend to
the author that all other provisions be eliminated so as to
restore existing law. Similar provisions could be added at a
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later point if and when the sponsor and the other stakeholders
identify with greater precision the shortcomings of AB 771 and
reach consensus on what should be done to address them.
ARGUMENTS IN SUPPORT : The sponsor, Associa, an HOA management
company, believes that this bill will "provide important and
necessary changes to a measure that was unanimously voted on
last year, AB 771." The sponsor contends that the purpose of
that bill "was to assure transparency during the transfer of
title process by requiring specific documents to be provided at
the time of transfer." The sponsor claims that a number of
issues were not addressed by AB 771 but that this bill will
correct, such as permitting a seller to procure and prepare
documents without having to rely on the HOA; prohibiting
cancellation fees; and requiring HOAs to provide a written or
electronic statement of the fees charged for documents.
Finally, this sponsor claims that this bill "changes wording to
comport with the intent of the law."
ARGUMENTS IN OPPOSITION : The Executive Council of Homeowners
(ECHO), which represents more than 1500 HOAs, argues that this
is premature and unnecessary given that last year's AB 771
already addressed these issues. ECHO writes that "not only is
the bill premature given the short time the current statute has
been in place, but as currently written, the bill creates
numerous problems." ECHO believes that, contrary to the
sponsor's stated intention, "the proposed amendments do not
eliminate concerns but rather creates additional ones."
The California Association of Community Managers (CACM) also
opposes this measure. Like the sponsor, CACM represents HOA
management companies, but construes the problems quite
differently. CACM writes that the "stated justification for AB
1838 is that clarification is needed to ensure third parties may
perform tasks on behalf of the association. We believe this is
unnecessary given that the Davis Stirling Act and California
decisional law already address and confirm this." CAMC adds
that we "are only four months beyond the effective date of AB
771 and believe it is premature to again alter matters that were
the subject of extensive negotiations last year. AB 771 was
crafted with all stakeholders involved, including the sponsor of
the bill." In addition to finding this bill "unnecessary and
premature," CACM fears that the bill "actually does harm by
further amending section 1368 to blur the line between
independent third party contractors and associations. By adding
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to section 1368(b)(4) the additional language, "or other tasks
associated with the transfer of title" it suggests that private
third parties must obtain authorization for tasks that fall
outside of the statutory authority granted to associations.
CACM concedes that there may be some areas of existing law that
need clarification, such as the status of cancellation fees.
REGISTERED SUPPORT / OPPOSITION :
Support
Associa
Opposition
California Association of Community Managers
Executive Council of Homeowners
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334