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Community Association Update: Issue # 47
- California Legislature Further Limits a HOA's Right to Restrict Rentals
- Political Signs and the Limits Imposed on a HOA's Ability to Regulate Same
- SB-908 Signed! Debt Collection Licensing Act
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Planning for the Unexpected: Force Majeure
- Insurance Coverage Denied & Bad Faith Claims
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This Community Association Update is part of our commitment to providing the highest quality legal services to our clients and industry partners. If your company or Association would like to see a topic or issue covered in future editions, feel free to call our offices, email us, or submit a question online!
Sincerely,
Steven Tinnelly, Esq.
Tinnelly Law Group
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California Legislature Further Limits a HOA's Right to Restrict Rentals
*New Legislation
On September 28, 2020, Governor Gavin Newsom signed Assembly Bill 3182 ("AB 3182"), which was introduced as another measure "to address the housing and homelessness crisis" in California. According to Assembly Member Phil Ting (the author of AB 3182), "[t]here are millions of homes across the state that have the potential to be rented to Californians in need of housing but that are prohibited from being leased under outdated [HOA] rules." While the stated objective of providing more affordable housing units is a laudable goal, AB 3182 significantly limits the extent to which HOAs may impose rental restrictions and prohibitions. Under AB 3182, California Civil Code section 4741 is added to the Davis-Stirling Common Interest Development Act and renders void and unenforceable any provision in a governing document or amendment thereto "that prohibits, has the effect of prohibiting, or unreasonably restricts the rental or leasing of" a separate interest "to a renter, lessee, or tenant." Despite this prohibition, Section 4741 does authorize a HOA to adopt and enforce: - A rental cap of twenty-five percent (25%) of the separate interests (or greater); and
- A provision "that prohibits transient or short-term rental of a separate...interest for a period of 30 days or less."
There is much uncertainty that remains concerning the extent to which other typical rental restrictions remain valid and enforceable. To the extent certain rental restrictions are rendered unenforceable by AB 3182, same must be removed from the governing documents no later than December 31, 2021. Failure to comply with Section 4741 may result in a HOA being liable for actual damages (e.g., lost rental income) and a civil penalty of up to one thousand dollars ($1,000). It is therefore important for each HOA to consult with their attorney to determine whether the HOA's rental restrictions are enforceable in light of AB 3182, and to take action to amend their governing documents to remove such unenforceable provisions.
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Political Signs and the Limits Imposed on a HOA's Ability to Regulate Same
As we draw near to the 2020 election, many residents living in HOAs have decided to install yard signs and other displays for their chosen candidate or cause. Many of these "noncommercial" signs have sparked fury in those who oppose such views, calling upon the Board of Directors to have such signs removed. Thus, in recent months, we have received numerous requests from our clients to provide an opinion as to the extent to which a HOA may regulate the display of such non-commercial signs.
It is without doubt that we currently live in a society with varying opinions on political and social issues. Such division has only become more polarized with recent events. While some might find the opinions espoused by certain groups repugnant, upholding a resident's right to express those beliefs and opinions through the display of signs on their property is more important than the minor discomfort some may experience in observing such signs. The only other option would be to prohibit residents from displaying any signs concerning issues of politics and social justice, something which the California Legislature has expressly forbidden: "[H]omeowners throughout the state shall be able to engage in constitutionally protected free speech traditionally associated with private residential property" and "shall be specifically protected from unreasonable restrictions on this right in the governing documents." (Historical and Statutory Notes, 8 West's Ann. Civ. Code (2007 ed.) foll. 1353.6, p. 184.)
Indeed, under California Civil Code section 4710(a), "[t]he governing documents may not prohibit posting or displaying of noncommercial signs, posters, flags or banners on or in a member's separate interest, except as required for the protection of public health or safety or if the posting or display would violate a local, state, or federal law." Some may nevertheless argue that certain noncommercial signs incite terror and/or rioting and therefore must be removed "for the protection of public health [and] safety." Although such argument is speculative at best, Section 4710's concern with public health and safety relates to concerns relative to the placement of such signs (e.g., view obstructions), not the fact that some might have an adverse emotional or physical reaction to such signs.
Again, it is important to recognize that many residents might find some of the political and social views promoted by their neighbors as offensive. Because they live in a HOA, they must necessarily tolerate differing viewpoints and loyalties. As the California Supreme Court has said, "[t]he very existence of organized society depends upon the principle of 'give and take, live and let live'...." (San Diego Gas & Electric Co. v. Superior Court . (1996) 13 Cal.4th 893, 937-38.) Therefore, in response to resident complaints, such residents should be informed of the limitation imposed by Section 4710 and directed to "avoid further bombardment of their sensibilities simply by averting their eyes." (Cohen v. California (1971) 403 U.S. 15, 21.)
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SB-908 Signed! Debt Collection Licensing Act
On September 25, 2020, Governor Newsom signed Senate Bill 908, the Debt Collection Licensing Act ("SB 908"), which creates a new licensing law applicable to debt collectors and debt buyers, administered by the Department of Business Oversight ("DBO"), effective January 1, 2022. Moreover, SB 908 provides for licensure regulation, oversight of debt collectors, definitions of terms, application requirements (including criminal background checks), maintaining surety bonds, and other related changes. SB 908, authored by Senator Wieckowski, was presented to ensure greater consumer protection through enhanced oversight over debt collectors and debt buying entities within California. The bill utilizes the foundations contained within the Rosenthal Fair Debt Collection Practices Act and Fair Debt Buying Practices Act. The goal of SB 908 is to add new a layer of regulatory oversight over debt collectors and debt buyers already subject to state law, but not currently subject to licensure. With the adoption of the bill, debt collectors and debt buying entities must apply for and be approved for a license by the Commissioner of Business Oversight. By requiring debt collectors and debt buyers to comply with licensing requirements, the belief is that the State will be better situated to ensure compliance with existing law.
The adoption of SB 908 has several important implications for Homeowners Associations ("HOA"). Notably, the new licensing requirement applies to natural persons, partnerships, corporations, limited liability companies, trusts, estates, cooperatives, associations, and other similar entities. This includes law firms and management companies involved in the collection of debt, including the collection of delinquent assessments. Thus, this bill directly impacts which entities may manage the HOA's assessment collections.
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Planning for the Unexpected: Force Majeure
If 2020 has taught us anything, it is to expect the unexpected. California community associations base their successful and continuing operations on careful planning and budgeting, but Associations must also plan for the unexpected. To that end, association vendor contracts should be drafted to ensure they afford adequate protections for when peril strikes.
Community associations regularly contract with vendors for a variety of services including landscaping and the maintenance and repair of common area components. Vendor contracts are often woefully sparse and fail to contain language to provide the parties with a mechanism to deal with unexpected disasters like war, fire, terrorist acts, or even pandemics like COVID-19. Force majeure is a Latin phrase that means "superior force." A force majeure contractual clause defines a set of events or circumstances beyond the contracting parties' control that may excuse or delay parties' contractual obligations for performance because performance would either be too difficult, impossible, or impracticable. Without it, the parties are bound to perform even in the face of a deadly viral pandemic which has resulted in shelter-in-place orders and business shutdowns across the state. Very few vendor contracts which have not been prepared or negotiated by an attorney contain force majeure clauses. While it is always advisable for Associations to have vendor contracts reviewed by counsel, COVID-19 is an additional reason to seek the advice of counsel before signing a vendor contract. Given that a pandemic and shutdown of this magnitude is, forever more, a foreseeable event, its description should be included in all force majeure contractual provisions moving forward, so as to erase any doubt as to what events constitute the triggering of a force majeure event. This ensures that not just a pandemic, but the effects of a pandemic, such as shelter-in-place orders, quarantines, government shutdowns, and other economic ripples caused by the response to an epidemic or pandemic be included in the definition of a force majeure event.
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Insurance Coverage Denied & Bad Faith Claims
Community associations buy insurance to obtain coverage in the case it becomes necessary. The reality is pre-litigation costs are expensive, ranging anywhere from a few thousand to tens of thousands of dollars. Litigation itself can be even more and this is not including any estimated fees for an appeal. No association wants to pay out of pocket for all these fees when there is a perfectly good insurance policy bought just for these types of situations. However, sometimes, an insurance company will want to cut corners to avoid paying out its policy coverage amount. If an association's insurance carrier(s) denies coverage, your association's legal counsel will work together with the insurance adjuster to persuade the insurance carrier to provide coverage, as a bad faith insurance claim would not be beneficial to either parties.
What is a bad faith insurance claim? The law implies a covenant of good faith and fair dealing in every contract, including insurance policies. (Wilson v. 21st Century Ins. Co. (2007) 42 Cal. 4th 713, 720). "[T]he essence of the implied covenant of good faith and fair dealing is that [t]he insurer must refrain from doing anything that will injure the right of the insured to receive the benefits of the [insurance] agreement, the terms and conditions of which define the duties and performance to which the insured is entitled." (Brandwein v. Butler (2013) 218 Cal.App.4th 1485, 1514- 1515.) Therefore, breach of a specific provision of the insurance contract is not a necessary prerequisite to bringing a bad faith claim. (Carson v. Mercury Ins. Co. (2012) 210 Cal.App.4th 409, 429.)
The implied covenant of good faith and fair dealing is breached where an insurer delays or denies payment of policy benefits unreasonably (i.e., without any reasonable basis for its position) or without proper cause. (Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1072-1073; see Wilson, supra, 42 Cal. 4th 713, 723, -"[A]n insurer's denial of or delay in paying benefits gives rise to tort damages only if the insured shows the denial or delay was unreasonable"; see also Chateau Chamberay Homeowners Ass'n v. Associated Int'l Ins. Co. (2001) 90 Cal.App.4th 335, 346.)
Insurance companies know that people buy insurance to obtain peace of mind and security, and that they expect to be paid promptly in the event of loss. (Egan v. Mut. of Omaha Ins. Co. (1979) 24 Cal. 3d 809, 819, 620 P.2d 141, 145.) Having sold insurance on this basis, insurers are not permitted to put their interest (in avoiding claims losses) ahead of the insureds' interests in obtaining the protection for which they bargained. (Id. at p. 819.
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