BILL ANALYSIS
SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: AB 1328
SENATOR ALAN LOWENTHAL, CHAIRMAN AUTHOR: Salas
VERSION: 6/23/09
Analysis by: Mark Stivers FISCAL: No
Hearing date: June 30, 2009
SUBJECT:
Common interest developments: length of contracts for water or
energy efficiency programs
DESCRIPTION:
This bill allows a homeowners' association of a common interest
development to enter into a contract of up to five years for a
water or energy efficiency program under specified conditions.
ANALYSIS:
A common-interest development (CID) is a form of real estate
where each homeowner has an exclusive interest in a unit or lot
and a shared or undivided interest in common area property.
Condominiums, planned unit developments, stock cooperatives,
community apartments, and many resident-owned mobilehome parks
all fall under the umbrella of common interest developments.
CIDs are governed by a homeowners' association (HOA). The
Davis-Stirling Common Interest Development Act provides the
legal framework under which common interest developments are
established and operate. In addition to the requirements of the
act, each CID is governed according to the recorded
declarations, bylaws, and operating rules of the association,
collectively referred to as the governing documents.
When a new CID is created, the Department of Real Estate (DRE)
must approve the original governing documents. DRE's
regulations for CIDs generally set a one-year limit on the
length of contracts unless a longer length is approved by a vote
of the members, though the regulations do allow certain types of
contracts, such as those related to insurance, laundry room
AB 1328 (SALAS) Page 2
equipment, cable television, and burglar and fire alarms to last
between three and five years without a vote. In addition, the
regulations allow for general contracts of up to three years
without a vote if the association may terminate the contract
without penalty after one year. The governing documents for all
new CIDs start off with these provisions. Once the developer
has sold the last of the units in the CID, however, the members
may amend these DRE-required provisions of the governing
documents in accord with the bylaws of the CID. While older
CIDs may predate and are therefore not subject to these
regulations, the governing documents of at least some of these
older CID's, if not most, contain a prohibition on contracts of
more than one year without a vote.
This bill allows an HOA, regardless of whether the governing
documents state otherwise, to enter into a contract of up to
five years for a water or energy efficiency program under the
following two conditions:
The board reasonably anticipates that the contract will result
in verifiable savings to the HOA.
In the event that the developer still has representation on
the board, the supplier is not an entity in which the
developer has a direct or indirect ownership interest of 10
percent or more.
COMMENTS:
1.Purpose of the bill . According to the author, the governing
documents in some CIDs have a provision limiting the duration
of all contracts to one year. The problem is that savings
from viable energy and water efficiency programs cannot be
realized within one year, and it may not be practical to
install the necessary infrastructure for only one year.
Consequently, it is not feasible for vendors to enter into
contracts with these CIDs. While it may be possible for these
CIDs to amend their governing documents or to submit the
longer contract to a vote of the membership, the process is
costly, so a statutory fix is the most efficient way to
accomplish this goal. This bill allows HOAs to enter into
contracts in excess of one year in order for them to take
advantage of energy and water efficiency technologies, results
in savings to the HOAs and the homeowners whose assessments
pay the costs of the HOA. It is estimated that efficiency
programs can reduce water and/or energy costs by approximately
50%.
AB 1328 (SALAS) Page 3
2.Consistent with other exceptions . Current DRE regulations
allow for a number of exceptions to the general rule on
one-year contracts. Contracts relating to insurance, laundry
room equipment, cable television, and burglar and fire alarms
may last between three and five years without a vote of the
general membership. The types of contracts affected by this
bill are not that dissimilar to the types of contracts covered
by the exceptions, and the bill similarly puts a five-year
limit on water and energy efficiency contracts that an HOA
board may agree to without a vote of the membership.
3.Overriding governing documents . By allowing contracts of up
to five years duration for water or energy efficiency
programs, whether the governing documents would otherwise
allow for this or not, this bill essentially overrides CID
governing documents. While this may facilitate the process of
entering into the contract without the time and expense
involved in amending the governing documents or submitting the
matter to a vote of the general membership, it would also
allow the board of directors potentially to approve a
long-term contract against the will of the members. The
sponsor points out that amending bylaws or putting the matter
to a vote of the membership is a costly and time-consuming
process, especially given the new statutory requirements for
CID elections, and that these costs will discourage or even
outweigh the benefits of entering into water- and
energy-saving contracts. The committee may wish to consider
whether the execution of water and energy efficiency contracts
is important enough to warrant the override of a CID's general
decision making process.
4.Providing notice . For an HOA board to approve any contract,
the item must be on the agenda for a board meeting. To the
extent that this bill allows an HOA board to approve a longer
contract than the governing documents would otherwise allow,
however, it may be appropriate for the agenda to note the
exception. The committee may wish to consider an amendment to
require that the agenda provide notice to members of the
length of the contract.
5.Arguments in opposition . Walnut House Cooperative believes
that the prohibition contained in their bylaws on entering
into contracts of more than one year without a vote of the
membership keeps the board accountable and minimizes poor
decisions. Overriding this vote requirement eliminates an
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important right of the members. If the members wanted to give
up this right, they would amend the bylaws to do so.
In addition to these arguments, Community Associations
Institute believes that the bill exposes CID members to
damages brought about by long-term board mistakes, which will
create a flurry of litigation. Moreover, the bill lacks
definitions of water and energy efficiency program, guidance
on how to calculate verifiable savings, and any disclosure to
members that their governing documents have been superseded.
Assembly Votes:
Floor: 48-29
H&CD: 5-1
POSITIONS: (Communicated to the Committee before noon on
Wednesday,
June 24, 2009)
SUPPORT: California Association of Community Managers
(sponsor)
OPPOSED: Community Associations Institute
Walnut House Cooperative