BILL ANALYSIS
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|Hearing Date:January 9, 2006 |Bill No:SB |
| |551 |
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SENATE COMMITTEE ON BUSINESS, PROFESSIONS AND ECONOMIC
DEVELOPMENT
Senator Liz Figueroa, Chair
Bill No: SB 551Author:Lowenthal
As Amended:January 9, 2006 Fiscal:Yes
SUBJECT: Common interest developments: ombudsperson.
SUMMARY: Creates an Ombudsman's Office within the
Department of Consumer Affairs to deal with Common Interest
Developments.
Existing law:
1)Enacts the Davis-Stirling Common Interest Development Act
which sets forth the rules and regulations under which Home
Owner Associations (HOAs) may operate in a common interest
development (CID).
2)Provides that parties to most disputes within a CID should
first resort to informal processes of dispute resolution, and
establishes minimum guidelines to assure such processes in
matters that are headed to litigation are "fair, reasonable
and expeditious." If the dispute does not involve pending
litigation, the parties are not required to use a third party
to help resolve their dispute, but must, at a minimum, meet
and confer with one another. If either an HOA or a homeowner
wishes to file an enforcement action in court, they must first
have tried to engage in some form of alternative dispute
resolution with a third party - though the law does not
require such efforts to be successful, or even to actually
occur.
3)Requires a CID to register every two years with the Secretary
of State (SOS) and to provide certain information regarding
the association. If the CID fails to register, the CID's
rights as a corporation may be suspended and the CID will be
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subject to monetary penalties.
4)Prohibits the board of directors of a CID from imposing a
regular assessment fee that is more than 20% greater than the
regular assessment fee for the CID's preceding year; emergency
assessments, as defined, are excluded from this limitation.
5)Requires secret ballots and other procedural safeguards for
elections in CIDs.
6)Provides some measure of protection to an owner's equity in a
CID home when they fail to pay relatively small assessments to
their common interest development associations. HOAs may not
file a foreclosure action to collect delinquent assessments of
less than $1,800 or any assessments that are more than 12
months delinquent. In such cases, an association may recover
the debt by going to small claims court. Also requires, to the
extent existing funds are available, that the Department of
Consumer Affairs (DCA) and the Department of Real Estate (DRE)
to develop an education website for the boards of directors of
HOAs regarding the role, duties, laws, and responsibilities of
board members and the nonjudicial foreclosure process.
7)Provides CID homeowners to access financial records and board
minutes, regulates the way in which boards of directors may
grant exclusive use access to common areas.
This bill:
1)Establishes the Office within the DCA, under the supervision
and control of the Director of DCA (Director).
2)Provides that the Director shall employ a CID Ombudsman
(Ombudsman) and other officers and employees necessary to
carry out the powers delegated to the Ombudsman by the
Director.
3)Requires an association, upon its biennial filing of
identifying information with the SOS, to pay a CID Ombudsman
fee. The initial fee shall be equal to $10 each 2 years
multiplied by the number of separate interests within the
association.
4)Provides that the Ombudsman shall increase or decrease the
biennial fee amount every 2 years in order to provide only the
revenue that it estimates will be necessary for the operation
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of the Office. The biennial fee shall not exceed $20 per
separate interest in an association.
5)Provides that an association is excused from paying the
biennial fee for a given separate interest if the association
certifies, on a form developed by SOS, that another
association has already paid the biennial fee for the separate
interest. The Ombudsman may adopt rules or regulations to
determine which association shall be responsible for paying a
separate interest fee if that separate interest is part of
more than one association.
6)Provides that the fee shall not be counted towards the
existing provision that an association may not increase
regular assessment fees by more than 20%, thereby making the
fee potentially an additional amount above the 20% cap on fee
increases.
7)Creates the Fee Account of the CID Ombudsman Fund and requires
SOS to transfer fee revenue to this account for the exclusive
purpose of funding the Office.
8)Requires the Ombudsman to offer training materials and courses
to CID directors, officers and owners regarding the operation
of a CID and the rights and duties of an association owner.
Provides that a fee may be charged for training materials or
courses that do not exceed the actual cost.
9)Requires the Ombudsman to maintain a toll-free telephone
number.
10) Requires the Ombudsman to maintain an Internet website
with the following
information:
a) Relevant statutes and regulations pertaining to the
operation of a CID.
b) Information concerning nonjudical resolution of
disputes, including locally available dispute resolution
programs.
c) Description of the services offered by the Ombudsman.
d) Contact information for the Ombudsman.
e) Any changes to laws governing CIDs and any other
information that the Ombudsman deems to be useful to an
association or owner.
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11) Requires information provided on the website to also be
available in written form.
Allows the Ombudsman to charge a fee for these materials
not to exceed their
actual cost of printing and delivery.
12) Requires an association to provide its members with
annual written notice of the
website address and toll free number of the Ombudsman.
13) Provides that any interested party may request the
Ombudsman to provide
assistance in resolving a dispute involving the law
governing CIDs or the governing
documents of a CID.
14) Requires the Ombudsman, after receiving a complaint, to
confer with the interested
parties and attempt to resolve the dispute through mutual
agreement. Provides that
the Ombudsman may offer to mediate a dispute if it cannot
first be resolved through
informal conference, and to establish a mediation program
or to contract for
mediation services.
15) Provides the Ombudsman may adopt a fee of not more than
$25 for mediation
services or may contract with private parties to provide
mediation services.
16) Requires that within 60 days of assuming office an
association director must file a
certification with the Ombudsman that they have read each
of the following: the
declaration, articles of incorporation, by-laws of the
association and either the
Davis-Stirling Common Interest Development Act or a
summary of the law.
17) Requires a person who is providing or proposes to provide
the services of a CID
manager to disclose to the board of directors in writing,
on an annual basis, that
they have read the governing document of the association.
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18) Requires the Ombudsman to report no later than October 1
annually to the
Legislature on the following:
a) The number of requests for assistance received.
b) How a request was or was not resolved and the staff time
required to resolve the inquiry.
c) The most common and serious types of disputes.
d) Any recommendations for statutory reform.
19) Requires the Ombudsman to submit, on or before January 1,
2009, recommendations to the Legislature on the scope of
the Office and the following issues:
a) Whether or not the Ombudsman should be
authorized to enforce CID law.
b) Whether or not the Ombudsman should have
authority to oversee association elections.
c) Whether or not the provisions requiring a new
association director or managing agent to certify they
have read the governing documents should be revised.
20) Allows the Ombudsman to establish an advisory committee
that is comprised of a
fair representation of interests involved in CIDs.
21) Provides that information and advice provided by the
Ombudsman has no binding
legal effect and is not subject to the rulemaking
provisions of the Administrative
Procedure Act.
22) Provides that the Ombudsman shall adopt rules and
regulations governing the
duties of the Office in accordance with the Administrative
Procedures Act.
23) Provides that the Office shall sunset on January 1, 2011
unless another statute is
enacted to delete or extend that date.
24) Makes legislative findings including the fact that there
are 36,000 CIDs in the state,
the complexities that volunteer director's face in
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managing and complying with
existing laws, and the adversarial nature of private
litigation which is the
mechanism under existing law to enforce CID law
FISCAL EFFECT: The bill has been keyed fiscal. However,
the proposal does not rely on General Fund money, but would
be financed through an assessment on each CID, based on the
number of units/homeowners.
COMMENTS:
1.Purpose. The bill (and an identical companion bill in
the Assembly, AB 770 (Mullin)) comes out of
recommendations from the California Law Revision
Commission (CLRC) to address problems within CIDs.
2.Background
A.) What are CIDS?
CIDs consist of groups of homeowners who also jointly own
a common interest in parts of the property. CIDs include
condominiums, community apartment projects, housing
cooperatives and planned unit developments. They are
characterized by a separate ownership of individual
dwelling space coupled with an undivided interest in
property common to all owners. An "undivided interest"
means that no owner has a "share" of the common property,
but rather all own it together without there being any
individual portions or areas. Unlike their ownership of
their own dwelling space, no owner can individually
decide to do anything they want with the common property.
The common property may be hallways and lobby areas (in
condominiums, for example), swimming pools, parkways,
streets, or virtually anything else.
B.) How many CIDs are there?
Both the CLRC and the Public Policy Institute of
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California (PPIC) have studied the emerging issues
related to CIDs in California. There is little doubt
that CIDs are now an established and growing part of
California's social fabric. According to PPIC, there are
over 36,000 CIDs in the state that range in size from
three to 27,000 units. CIDs make up over 3 million total
housing units in California alone, and they represent
approximately one quarter of the state's housing stock.
More significantly, PPIC points out that in the 1990s,
over 60% of all new residential construction starts in
the state were CIDs. This very strongly suggests that
any problems currently existing with CIDs will grow at a
high rate in the years to come.
C.) What are CC&Rs?
All owners in a CID must agree to abide by a set of
Covenants, Conditions and Restrictions (CC&Rs) that limit
not only the use of the common area, but even certain
aspects of the separate ownership interests of each
individual. For example, CC&Rs may regulate the color
that homes may be painted, whether owners may have pets,
or what kind of trees may be planted on a homeowner's
individual property. The California Supreme Court has
clearly ruled that the CC&Rs are presumed to be
reasonable and are thus enforceable in virtually all but
the most exceptional cases. Consequently, the terms of
the CC&Rs are extremely important for every homeowner to
read and understand.
D.) What is an HOA?
The common management of CIDs is the responsibility of a
Home Owners Association (HOA), run by an elected board of
directors who must be owners in the CID. Among their
powers is the ability to enforce and interpret the terms
of the CC&Rs, to levy assessments on the owners, and to
create new rules on behalf of the homeowners. In this
sense, then, HOAs exercise a form of governmental
authority within a CID - and are, in effect, all three
branches of the "government:" executive, legislative and
judicial.
All those who buy into a CID are required to receive a
brief overview of CID ownership. The following
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statutorily mandated language from that disclosure sums
up the rights and responsibilities of CID ownership:
When contemplating the purchase of a dwelling in a
common interest development, you should consider
factors beyond the attractiveness of the dwelling
units themselves. Study the governing instruments
and give careful thought to whether you will be able
to exist happily in an atmosphere of cooperative
living where the interests of the group must be
taken into account as well as the interests of the
individual. Remember that managing a common
interest development is very much like governing a
small community . . . the management can serve you
well, but you will have to work for its success.
Many CIDs contract with outside management companies to
advise them on proper management techniques and
procedures. The management companies may not,
themselves, make decisions, which are the sole
responsibility of the elected Board. However, like
accountants or lawyers, these professionals may have
access to information and networks that can help them in
their decision-making process.
E.) What is the State's involvement with CIDs?
Except when CIDs are first developed, no state agency
provides ongoing oversight to these communities. During
initial construction, when the first owners are moving
in, the DRE oversees the beginning stages of the HOA,
particularly focusing on the governing documents, such as
the CC&Rs. When the final homeowners have moved in, DRE
involvement ends, and the HOA is fully in charge of all
governance.
F.) What do other states do about CIDs?
Other states, including Florida, Nevada and Hawaii,
provide services to CID associations similar to the ones
being proposed for California. Therefore, their
experience can be helpful as California decides how to
proceed.
Both Florida and Nevada assess an annual fee paid on
homeowners and have found significant public demand for
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the services of programs regulating CIDs. In 1997, the
Nevada Legislature created the Office of the Ombudsman
for Owners in Common Interest Communities to provide
services to CIDs, including education and informal
dispute resolution.
Nevada has approximately 2,073 CIDs made up of 310,501
separate interests, which represents one-tenth the number
of CIDs in California. The Nevada Ombudsman charges a $3
annual fee per separate interest and employs 13 full-time
staff. In 2003, the Nevada program was expanded to
include the power to enforce the laws.
In Hawaii, the Real Estate Commission provides services
to condominiums, including referrals and subsidies for
mediation services, publishes information on its website
and in print, and responds to specific inquires. The
Hawaii program is funded by a $4 per unit biennial fee
charged to registered condominiums. Hawaii has 135,000
condominiums and in 2004 received 22,000 requests for
information or advice. If the experience of Hawaii is
extrapolated to California, the Ombudsman could expect to
receive 488,000 requests for assistance.
3. Arguments in Support.
CLRC argues that the Ombudsman is necessary in order to
provide a centralized place to disseminate consistent and
correct information about CIDs, as well as to collect
information about CIDs - and, perhaps, to provide for
mediation. Mistakes and misunderstandings are not uncommon in
the CID context:
"CIDs are governed by volunteer directors, elected
from among the unit owners. Faced with the complexity
of CID law, many of these volunteers make mistakes and
violate procedures for conducting hearings, adopting
budgets, establishing reserves, enforcing rules and
restrictions, and collecting assessments. Many CID
homeowners do not understand their rights under CID
law and under their association's governing documents.
These sorts of mistakes and misunderstandings
inevitably lead to conflicts within the development,
either between the association and an individual
homeowner, or between homeowners."
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Because CIDs are made up of people's homes, there is no
way to escape problems that develop in these communities.
Disputants must come into regular and often unavoidable
contact with one another. Consequently, small disputes
that are not resolved can fester, and escalate into
larger issues. While resolution in other contexts could
be found in the courts, this is problematic in the CID
context, according to CLRC:
"A homeowner who believes that a community association
is violating the law or has otherwise breached its
duties has no effective remedy other than civil
litigation. Litigation is not an ideal remedy for
many common interest development disputes. Homeowners
who sue their associations are suing their neighbors
and themselves. The adversarial nature of litigation
creates animosity that can degrade the quality of life
within the community and make future disputes more
likely to arise. Litigation imposes costs on the
community as a whole - costs that must be paid by all
members through increased assessments."
While the California Alliance for Retired Americans (CARA)
does not fully support the Ombudsman, they have expressed
commitment to the idea of an Ombudsman in this area. However,
they note some significant problems in the current bill. One
is that it does not go far enough. CARA sees the need for the
Ombudsman to have enforcement powers, which the author removed
from earlier versions of the proposal. CARA also has concerns
about financing the Ombudsman from fees on homeowners.
In addition, CARA notes that the HOA exercises virtually all
governmental authority - executive, legislative and judicial.
They make the rules, enforce the rules and interpret the rules
that will affect the lives of virtually every one of the
homeowners within the CID. This concentration of power in one
usually volunteer association can lead to suspicion and
distrust among homeowners, as well as abuse by less-scrupulous
or well-informed board members, in both small matters and
large.
The Executive Council of Homeowners (ECHO) supports the bill,
arguing that the Ombudsman could help to reduce costly
litigation over CID disputes. The Ombudsman can also assist
volunteer directors to comply with the complex body of CID
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law.
Numerous individuals living in CIDs throughout the state
have submitted letters and testimony to the various
committees which have held hearings on this subject.
Most cite personal examples of problems, ranging from a
recalcitrant Board that will not let residents see
financial documents (in what appears to be a clear
violation of existing law), to disputes over whether a
flamingo lawn ornament is consistent with the CC&Rs, a
determination that balances on whether it would "enhance
the beauty of the community" or not. They all support
various ideas in this bill.
4.Arguments in Opposition.
Cal-Tax opposes the bill, labeling the fee on homeowners
as a "tax."
In addition, some individuals have expressed personal
opposition to the Committee. Some have made an argument
similar to Cal-Tax's. Others, however, are primarily
concerned, not with the potential good the Ombudsman
could do, but rather that it is not worth the cost to
homeowners. The fee that would be imposed on CIDs on a
per-unit basis is viewed by opponents as not commensurate
with the value they would or might receive from the
Ombudsman. Many of the services, such as providing
information or mediation, are readily available, and
utilized by homeowners when needed. Most CIDs already
impose regular fees and assessments on owners, and this
state-mandated fee, while minimal, would be an additional
burden.
5.Sunrise Review
The proposals in this bill and its companion, AB 770, were
reviewed by the Joint Committee on Boards, Commissions and
Consumer Protection, which held a full hearing last
November. By statute, any proposal to create a new
regulatory board or commission in state government
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undergoes Sunrise Review -- the statutory counterpart to
the Joint Committee's Sunset Review, which provides ongoing
review of existing regulatory boards and commissions to
determine whether they are accomplishing the goals the
legislature established for them.
On January 4, 2006, the Joint Committee voted to support
creation of the Ombudsman, though its recommendations were
not entirely consistent with the current proposal.
Specifically, the Joint Committee recommended that:
1. There appears to be sound public policy reasons to
create an Ombudsman to deal with CIDs;
2. It is currently not clear whether there is adequate
need or demand for a state-run mediation program
specific to CIDs;
3. It would make no recommendation on how the
Ombudsman should be funded.
1.Proposed Amendments.
Funding: As indicated above, the Joint Committee voted
not to make a recommendation concerning the funding
mechanism in this proposal because there is currently too
little information to determine answers to some critical
questions, including:
1. Whether there is adequate support for the
proposal among CID homeowners themselves - who would
be paying for the Ombudsman through the fees
required in the current draft of the bill;
2. How funding that might be used to subsidize a
mediation program would affect the existing market
for mediation in CID disputes;
3. If some other funding mechanism other than the
fee imposed by the bill might be available.
In light of those concerns raised by the Joint Committee,
perhaps the funding should be removed from the bill and
discussed in more detail in the Appropriations Committee.
1.Latest Amendments.
Dispute Resolution and Mediation Services: The Senate
Judiciary Committee expressed several concerns about the
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mediation proposed in this bill, and the Joint Committee
basically made no recommendation on this potential
function of the Ombudsman. As of Friday, Jan. 6, the
author removed the provisions related to mediation:
However, the author has also stated he would continue to
consider appropriate provisions concerning mediation, and
if they are incorporated into the bill, or a successor,
that the bill would be heard in the Judiciary Committee.
2.Related Legislation.
AB 770 (Mullin) currently contains provisions identical
to those in this bill, and will be heard January 10, 2006
in the Assembly Business & Professions Committee.
NOTE: The bill passed out of the Senate Transportation and
Housing Committee in April of last year. If it passes this
Committee, it is currently scheduled to be referred back to
Rules Committee.
SUPPORT AND OPPOSITION:
Support: California Law Revision Commission (CLRC) (Sponsor)
California Dispute Resolution Council
Executive Council of Homeowners (ECHO)
League of California Cities
Numerous Individuals
Support with Amendments : California Alliance for Retired
Americans (CARA)
Opposition: Cal-Tax
Several Individuals
Consultant:David Link