Rules Enforcement

A Focus on Covenant Enforcement

In practically every discussion of topics related to HOA governance, it is important to remember that one size does not fit all.  Consider how the following factors can define the simplicity or complexity of covenant enforcement:

  • State laws vary widely such as board authority versus membership votes to adopt or amend governing documents, rules and resolutions, requirements for hearings and limitations on fines.
  • Covenant/rule violations are less personal when consistently enforced by a management company based on written procedures and policies adopted by the board.  Enforcement may be interpreted more personal for self-managed boards.
  • Covenant/rule enforcement is significantly more challenging when there is a legacy of non-enforcement or selective enforcement.
  • Issues vary by type of association.  Condominiums and townhomes frequently deal with issues of noise and parking.  Single-family associations on the other hand deal more frequently with home additions, fences, landscaping, and playground equipment.

Covenant/Rule enforcement is one of the most difficult aspects of running a homeowners association.

The Board has a duty to reasonably enforce the covenants and rules, and avoid risking liability to the board, committee members or to the association. At the same time, board members are residents with neighbors and friends in the community.  Covenant enforcement can result in personal attacks, disharmony, and polarization.

Enforcing the association’s covenants/rules can cause destructive emotional conflicts in associations. Two fundamental undercurrents collide:

  1. It is my land, and nobody can tell me how I can use it.
  2. The use of one’s land affects the neighbor’s rights and the rights of subsequent purchasers.

Violators can become emotional about the enforcement action taken. Neighbors can become emotional about a lack of enforcement action taken.

Why Have Rules

  • Protect the property values and assets of the community.
  • Required by the governing documents.
  • Legal Obligation – A board and its individual members are considered agents of a corporation and are liable for the actions of a nonprofit organization.
  • Avoid court rulings against the association and expensive legal fees for poorly developed or enforced rules.
  • Promote community harmony.

Who Breaks the Rules?  Violators can be lumped into four categories:

  • Uninformed homeowners – This frequently results with first-time homebuyers who are not familiar with the HOA concept, to experienced but apathetic homeowners, to culturally diverse communities where knowledge and language barriers compound issues. Use educational opportunities such as a welcoming brochure, email, and website to inform.
  • Procrastinators – Use procedure and persistence.
  • Hardship cases – often willing to remedy the violation when they understand the escalating costs of enforcement and that the associations may be willing to waive the fines for compliance or arrange a payment plan.
  • Defiant homeowners – a threatening initial communication will often result in a defensive and threatening response.  Do not confront.  Follow procedure and try to prevent escalation.  Be prepared to consult with the association’s attorney.

In all situations, the association should open the door to establishing communications and expressing a desire to work together to address the issue.

Two Types of Rules

Architectural Guidelines typically apply to the exterior appearance of the property.  Some examples:

  • Fences
  • Decks & Patios
  • Sheds and Outbuildings
  • Boat & RV Parking
  • Satellite Dishes
  • Mailboxes
  • Exterior Colors
  • Building Materials
  • Pools
  • Playground Equipment
  • Landscaping

Rules typically apply to issues where the behavior of one resident, tenant, or visitor has an adverse impact on a neighbor.  Some examples:

  • Use of Common Areas
  • Pet Restrictions
  • Parking
  • Solicitation & Yard Sales
  • Garbage & Trash
  • Noise
  • Leasing Restrictions
  • Age Restrictive
  • Single Family Use
  • Residential Use/Business Use

Inspections

Without regular inspections, covenant violations often go undetected which makes enforcement more difficult.  Sometimes a delivery of building materials and knowing that an architectural review application has not been approved is sufficient to inquire.  Sometimes the scope of work is expanded without approval.  The board, architectural review committee and management company, should watch for any new construction activity and respond immediately.  Emotions will be elevated if a homeowner is advised that a project cannot proceed and may have to stop completely.  In extreme situations, it may be necessary for the association’s attorney to file an injunction stopping work.  The board should also know it is authority to enter private property in order to inspect.

Sources of Authority

As a Board Member or Director of a homeowner association, you have certain powers, duties, and authority that are required in most cases by federal and state laws; local ordinances, and association documents.  This includes covenant and rules enforcement.

Liability of Corporate Boards of Directors

What liability do corporation board of directors members have in their board positions? Not as much as you might expect. Corporate board members have a good deal of latitude within the scope of their duties as corporate board members. Board members must be free to act in the interest of the shareholders in order to run the association in the best way they see fit.  That said, most boards purchase Directors and Officers insurance (D&O) to protect themselves and the association against lawsuits.

Boards should not become involved in neighbor versus neighbor disputes.  Whenever possible, the Board should refer enforcement of certain covenant violations to local or state authorities.  Municipal code enforcement of abandoned cars and animal control are two examples.

Avoiding Lawsuits & Defenses for Failure to Enforce the Covenants/Rules

Ultimately, an association’s approach to covenant enforcement is critical. The association should ensure that it timely, consistently and uniformly enforces its documents, including the covenants and restrictions. Associations should understand the failure to timely, uniformly and consistently enforce the documents, subjects the association to defenses which could preclude enforcement, both concerning the individual case at hand as well as future cases. As such, an association which postpones or allows deviations from the requirements of its documents is putting itself and its future enforcement actions in jeopardy. Many associations fail to realize that significant defenses can arise by virtue of their failure to enforce their documents timely, uniformly and consistently. Such defenses include, but are not necessarily limited to the following:

  • Laches – which in layman terms means simply by virtue of the passage of time, the association’s rights may become stale and unenforceable (i.e., if the association fails to timely enforce a provision, it may lose its right to enforce it);
  • Selective Enforcement – which in layman terms means the association should be precluded from enforcing against Mr. Jones that which it does not enforce against Mr. Smith.
  • Waiver – which in layman terms means a relinquishment of a known right (i.e., the association must have a right and knowingly and voluntarily relinquish the right)
  • Estoppel – which in layman terms means in fairness, in equity, the association should be precluded from enforcing a provision by virtue of some previous action or potentially some inaction.

Check Your Documents for a No Waiver Clause

Many association documents have language that states in no event shall the Association’s failure to enforce any covenant, restriction or rule provided for in the Declaration, the Bylaws or the Rules constitute a waiver of the Association’s right to later enforce such provision or any other covenant, restriction or rule.

Other Enforcement Measures

  • Suspension of Voting Rights
  • Suspension of Use of Recreational Facilities and Common Areas

Use of Government Agencies to Enforce

  • Health Department for multiple families in a single unit
  • Inspections & Zoning for fence or sheds, setback requirements, commercial use of residences, abandoned vehicles, building permits
  • Police for traffic on public streets and possibly towing
  • Fire Department for parking that interferes with fire lanes;  also, hazardous materials
  • Animal Control for lease laws, waste removal, number of pets, nuisance, dangerous pets, exotic animals

Avoiding Covenant/Rule Violations

  • Education and Communication is Key
  • New Member Welcome Package
  • Email Reminders
  • Websites
  • Reminder enclosure in mailed annual meeting notice and assessment increase notice.
  • Lease Requirements & Educating Tenants
  • Review and amendment of governing documents for outdated and conflicting provisions.

Solutions for Associations That Have Failed to Enforce the Covenants/Rules

A common scenario is the self-managed association that has over time neglected to set rules and consistently and effectively enforce them.  The appearance of the community has crossed a ‘threshold point’ where residents frequently complain.  The association may be operating without an active board.  Typically, a few residents are encouraged to run for office, and a new board is elected with a mandate to ‘straighten things out”.  This is a difficult process; however, it only becomes more difficult if unaddressed over time.

Suggestions:

  • Conduct an informal inspection of the community and make a list of violations.
  • Review the association’s documents with particular attention to approved rules and policies that have been previously distributed to residents.
  • Consult with an HOA attorney regarding laws that may have changed and the risks/rewards and costs of enforcement.  For example, a board or architectural review committee that failed to respond to a written request in a prescribed time frame may be unable to enforce the covenant/rule.
  • Inform the residents with a Notice that the Board is Reviving Overlooked Rules

The Notice should address the following:

  • The value to the community of having rules
  • That previously overlooked rules will once again be enforced in a fair and consistent manner.
  • List those rules that will be enforced and provide copies of rules that have been previously adopted.
  • That rules will generally not be enforced retroactively.  Consult with an attorney regarding retroactive enforcement.
  • Provide reasonable grace periods based on the type of violation for residents to comply with the revised rules.

Summary of Recommendations

  • Educate residents with periodic email reminders.
  • Conduct regular inspections.
  • Review the governing documents with regard to architectural control.
  • The association should maintain a book of adopted resolutions and rules that are supported by meeting minutes.
  • Utilize the resources of a management company and or attorney who is experienced in homeowner association laws for your state.
  • Associations should adopt a specific covenant enforcement procedure via a resolution.
  • Associations, using the adopted covenant enforcement procedure, should uniformly, timely and consistently enforce the covenants/rules regardless of the violation and regardless of the violator.
  • Adopt resolutions or rules where needed that specify specific policies for covenant/rule enforcement.
  • Maintain D & O Insurance and consult with your agent regarding exposure to ‘exclusions.’

 

  Foreclosures: California’s One Action Rule

With interest rates on adjustable mortgages on the way up, the pundits suggest we are headed for another round of foreclosure activity the likes of which we have not seen since the S&L crisis in the 1980s. That makes now a good time to review the laws relating to foreclosure and deficiency judgments—and recent changes that have occurred in that area.

The Legislature enacted the One Form of Action rule—often simply called the One Action Rule—to eliminate multiple actions when a creditor elects to sue after a debtor’s real property has gone into default. It specifically provides: “There can be but one form of action for the recovery of any debt, or the enforcement of any right secured by mortgage upon real property.” (Cal. Code of Civ. Proc. § 726(a).)
In jurisdictions without such a rule, property owners can be forced to simultaneously defend against both a personal action on the debt and a foreclosure action on the security, making it difficult, if not impossible, for the debtor to avoid a deficiency judgment. Not only is this unfair to property owners who reasonably relied on the value of the security for protection from personal liability, but it further strains limited judicial resources.

California’s deficiency-judgment statutes were intended to work in tandem with the One Action Rule to avoid such problems. Because the One Action Rule has the effect of inducing most creditors to foreclose on their security interests before seeking a personal judgment, these statutes protect debtors from a deficiency judgment if the property subject to foreclosure is a dwelling intended to be occupied by four or fewer families—one of which includes the purchaser—and if the loan secured by the deed of trust or mortgage was used to pay all or part of the purchase price of the property being foreclosed. (Cal. Code of Civ. Proc. Code § 580b.)

The purposes behind the One Action Rule and the deficiency-judgment statutes are to prevent multiple actions, compel exhaustion of all security before a deficiency judgment is entered, and ensure that debtors are credited with the fair market value of the secured property before they are subjected to personal liability. (See In re: Prestige Ltd. Partnership-Concord v. East Bay Car Wash Partners, 234 F.3d 1108, 1115 (9th Cir. 2000).)

Deficiency-Judgment Protection

In the years leading up to the S&L crisis, many lenders had substantially relaxed their appraisal standards. Profits were high and the focus was on making loans, not on ensuring that the underlying security was adequate. When properties began to go into default at unprecedented rates, it became obvious that thousands of appraisals were inflated, and countless borrowers were unnecessarily exposed to debt far in excess of the value of their secured real property. In short order, this vicious cycle flooded the pool of Real Estate Owned (REO) properties in lender inventories and ultimately brought down a major industry.

A primary purpose of the antideficiency statutes is to place the risk of such overvaluation and inadequate security on the lenders who stand to profit directly from the loans they make. Taken together, sections 726, 580a, 580b, and 580d of the California Code of Civil Procedure constitute a comprehensive statutory scheme that specifically protects defaulting borrowers from being taken advantage of by overly aggressive lenders who may care more about making loans than protecting borrowers. (See Clayton Dev. Co. v. Falvey, 206 Cal. App. 3d 438, 445 (1988).)

Under this scheme, if the proceeds from the sale of the real property are insufficient to cover the debt, the lender’s right to a deficiency judgment may be limited or barred under one or more of these statutes. (See Prestige, 234 F.3d at 1115.) Thus, the One Action Rule works in concert with California’s deficiency-judgment statutes to give a borrower leverage against a creditor who wants the freedom to choose between either enforcing a security interest via a foreclosure proceeding, or circumventing the antideficiency statutes and suing on the underlying note-whichever better suits its needs. (See Clayton Dev. Co., 206 Cal. App. 3d at 445.)

Exceptions to the Rules
The antideficiency provisions, which primarily aim to protect against overvaluation by lenders, apply automatically only to standard purchase-money transactions. (See Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35, 41 (1963) and Sprangler v. Memel, 7 Cal. 3d 603, 610, and 612 (1972).) Thus, for example, section 580b does not apply when the purchaser intends to proceed with a different use of the property, such as commercial development, because the purchaser controls the success of the venture and should bear the risk of failure.

Section 580b also does not apply when the borrower has refinanced the real property, often to take out additional equity or obtain financing at better terms. (See Union Bank v. Wendland, 54 Cal. App. 3d 393, 400 (1976).) Conversely, when the borrower has never refinanced and the real property is still encumbered by the original purchase-money trust deed, the borrower retains the protection of the antideficiency-judgment statutes. (See Foothill Village Homeowners Ass’n v. Bishop, 68 Cal. App. 4th 1364, 1367 n.1 (1999).)

The Dual Role

For a borrower in default, the One Action Rule offers two important benefits. It may be used upfront as an affirmative defense, or it may be invoked later as a sanction.

If the borrower successfully asserts the One Action Rule as an affirmative defense, the lender will be forced to foreclose its security interest before pursuing a money judgment against the debtor for any deficiency—if that is even possible given the protections available to the borrower under the antideficiency statutes. (See Security Pacific Nat’l Bank v. Wozab, 51 Cal. 3d 991, 997 (1990).)

A borrower who wishes to rely on the antideficiency-judgment statutes to avoid personal liability must raise the One Action Rule as an affirmative defense in the answer or, at the latest, by the start of trial—that is, when the lender would still have a chance to comply with the rule-or he or she is “simply too late.” (See Scalese v. Wong, 84 Cal. App. 4th 863, 868 (2000) and Spector v. National Pictures Corp., 201 Cal. App. 2d 217, 225—26 (1962).)

However, a borrower who fails to assert the One Action Rule as an affirmative defense may still invoke it as a sanction against the lender, because by not foreclosing on its security interest in the action brought to enforce the debt, the lender has made an election of remedies and waived any right to subsequently foreclose on the security or sell the security under a power of sale. (See Security Pacific Nat’l Bank v. Wozab, 51 Cal. 3d 991 at 997 (1990) and Prestige Ltd. Partnership-Concord v. East Bay Car Wash Partners, 234 F.3d 1108 at 1114 (2000).)

Beginning in 1990, the law changed in two important ways. First, the California Supreme Court held that a creditor cannot be subject to the double sanction of losing both the security interest and the underlying debt. Second, a court of appeal held that a creditor could not enforce an agreement with the debtor to waive application of the One Action Rule as a sanction. These decisions have significant ramifications for borrowers and lenders alike.

No Double Sanctions

The landmark case of Security Pacific Nat’l Bank v. Wozab places limits on using the One Action Rule as a sanction. In Wozab the California Supreme Court held that it would be inequitable to subject a lender to the double sanction of losing both the security and the underlying debt. Indeed, the court held that allowing the Wozabs to evade their debt almost in its entirety would be both a gross injustice to the bank and a corresponding windfall to the Wozabs, allowing them the benefit of their bargain without incurring the burden. (51 Cal. 3d at 1005—06.)

Later decisions by the Ninth Circuit Court of Appeals continue to apply the precedent set in Wozab.

In DiSalvo v. DiSalvo, the Bankruptcy Appellate Panel of the Ninth Circuit reversed, in part, a decision that double-sanctioned a creditor’s efforts to collect first on the debt, in violation of section 726, by extinguishing both the security interest in the real property and, indeed, the $100,000 debt itself. (221 B.R. 769, 775 (9th Cir. 1998), overruled in part as to other issues by In re DiSalvo v. DiSalvo, 219 F.3d 1035 (9th Cir. 2000).) Although, as the bankruptcy court observed, the creditor’s actions in attempting to collect the $100,000 debt netted only $83, the creditor controlled the security-first aspect of the One Action Rule and could have invoked it at any time to bar the collection efforts.

Because a bankruptcy court can provide sufficient protection for a debtor whose business is threatened by the actions of a creditor without requiring that the creditor forfeit both the security and the debt, the appellate court held that the bankruptcy court’s sanction of extinguishing the debt was an abuse of discretion “so severe as to be punitive and would result in a windfall to debtor.” (219 F.3d at 1037.)

In Prestige Ltd. Partnership-Concord v. East Bay Car Wash Partners, decided later the same year, the Ninth Circuit was asked to address the issue again in a case in which the debtor sought to bar a creditor’s unsecured claim against his bankruptcy estate. (234 F.3d at 1111 (2000).)

Prestige, the debtor, purchased a car wash business from East Bay, the creditor, giving East Bay a promissory note secured by a deed of trust that included the personal guarantee of one of Prestige’s partners, Jerry Brassfield. After Prestige defaulted on the note, East Bay filed an action on the guaranty rather than foreclosing on its security interest in the car wash. Although Brassfield asserted the One Action Rule as an affirmative defense, East Bay obtained a writ of attachment against $75,000 in Brassfield’s personal bank accounts.

Shortly thereafter, Prestige filed a petition for bankruptcy. The bankruptcy court held that Brassfield was a primary obligor on the note, ” ‘such that the purported guaranty added no additional liability,’ and that East Bay had taken its action under § 726(a), resulting in waiver of its security interest in the real property.” (234 F.3d at 1112.) As a result, the superior court dissolved the writs, and East Bay released its attachment.

Unable to collect against the guaranty and having lost its security interest in the car wash, East Bay filed proof of its now unsecured claim in the bankruptcy action. The bankruptcy court decided in the creditor’s favor, holding that East Bay “lost its security only, not its debt, and was not subject to the provisions of § 580b.” The Ninth Circuit affirmed, citing Wozab and DiSalvo. In reaching its decision, the appellate court noted that Prestige had taken advantage of its right to invoke the sanction aspect of section 726 in the bankruptcy court, resulting in East Bay’s loss of its security interest.

Moreover, just as in Wozab—where the court observed that the debtors had accepted the bank’s reconveyance of the deed and thus acquiesced in, indeed demanded, the bank’s decision not to foreclose—Prestige was the one who sought to have East Bay’s security interest waived. Thus, under the holdings of both Wozab and DiSalvo, it would be inequitable to impose a double sanction that would deny East Bay both its security interest in the car wash and the underlying debt. (234 F.3d at 1115.)

The law is clear: Violating the One Action Rule extinguishes the creditor’s security interest, but not the debtor’s underlying obligations. Thus, after Wozab and its progeny, debtors who are protected by the deficiency-judgment statutes should take care not to waive the One Action Rule lest they lose its protection, yet remain liable “in total” for their debts.

No Waiver of Sanction

In O’Neil v. General Security Corp., the court held that a borrower’s agreement with his lender to waive application of the One Action Rule as a sanction and allow the lender, who had already brought a personal action against the borrower, to proceed with a foreclosure action against the secured property is not enforceable. (4 Cal. App. 4th 587, 598 (1992).)

First, the court held that the sanction aspect of the One Action Rule operates for the benefit of both the primary borrower and third parties claiming an interest in the property, whether as successors-in-interest or as third-party lienholders. As such, the court concluded that the security and priority rights in the secured property held by a third party have independent status, are entitled to independent protections, and cannot be defeated by unilateral waivers by the borrower in favor of the lender. Indeed, the court questioned whether such a waiver agreement would even be enforceable against the borrower who made it.

Second, the court held that all of the lender’s remedies, including foreclosure of the security, merge into and are extinguished by the judgment, limiting the lender’s subsequent remedies to those remedies available to it as a judgment creditor.

Third, the court held that if a borrower’s waiver agreement were enforceable, many of the policies and protections of the statutory scheme would be undermined.

Although the O’Neil decision might trap an unwary lender who pursues a personal judgment first in reliance on the borrower’s agreement to waive the sanction aspect of the One Action Rule, this is not its greatest danger. A bigger problem could arise if a lender secures a single promissory note with deeds of trust on properties located in multiple jurisdictions, one of which is California. If the note goes into default, the lender might want to commence foreclosure actions against its security interests in all jurisdictions simultaneously. However, under California’s One Action Rule, filing a foreclosure action in another jurisdiction before foreclosing the lender’s security in this state could result in the lender losing its security interest in the California property.

In addition, under the holding in O’Neil, an agreement with the borrower to waive the sanction aspect of the One Action Rule following a default would be of no help. Thus, before proceeding with such an arrangement, a prudent lender should carefully consider its exit strategy in the event that the loan goes into default.

Introduction to Receiverships

Receivers are employed in civil cases when absolutely needed to control and protect an entity’s assets. All bench officers and litigants in civil matters employing receivers should have a working knowledge of this area of law.

The objective of this article and self-study test is to provide an introduction to receiverships. Readers will learn about what receiverships are, when they are appropriate, the scope of their powers, and contempt proceedings to enforce their orders.

A receiver is a court officer who is appointed to take possession of and to protect assets for the appointing court for the benefit of all persons who may ultimately be shown to have an interest in those assets. The receiver acts under the court’s control and continuous supervision. See Turner v. Superior Court of Kern County, 72 Cal.App.3d 804 (1977).

California Rule of Court 3.1179 states that, “The receiver is an agent of the court, not of any party to the litigation, and as such: (1) is neutral; (2) acts for the benefit of all who may have an interest in the receivership property; and (3) holds assets for the court, not the plaintiff nor the defendant.”

A receiver may be appointed, in the manner provided in Code of Civil Procedure Section 564 et seq., by the court in which an action or proceeding is pending in any case in which the law empowers the court to appoint a receiver. Code of Civil Procedure Section 564(a). Unlike an injunction, which may be either provisional or permanent, a receivership is only a provisional remedy in an action that seeks some other relief by final judgment.

There is no substantive right to a receiver and no action for a receiver. Associated Creditors’ Agency v. Wong, 216 Cal.App.2d 61 (1963). As the court said long ago in French Bank Case, 53 Cal. 495 (1879): “these subdivisions do not assume to create a sense of the right of action where none existed before. Their aim is to provide a more efficacious remedy to the conduct of actions, the right to bring which already exists, and are elsewhere provided for…. There is, of course, no such thing as an action brought distinctively for the mere appointment of a receiver – such an appointment, when made, is ancillary to or in aid of the action brought. Its purpose is to preserve the property pending the litigation so that the relief awarded by the judgment, if any, may be effective. The authority conferred upon the court to make the appointment necessarily presupposes that an action is pending before, instituted by someone authorized by law to commence it.”

A receiver can be appointed only when authorized by statute or equity. March v. Williams, 23 Cal.App.4th 238 (1994). Code of Civil Procedure Section 564 is the primary statutory authorization.

The most commonly relied upon provisions in Section 564 are ones authorizing a receivership, “In an action by a vendor to vacate a fraudulent purchase of property, or by a creditor to subject any property or fund to the creditor’s claim, or between partners or others jointly owning or interested in any property or fund, on the application of the plaintiff, or of any party whose right to or interest in the property or fund, or the proceeds thereof, is probable, and where it is shown that the property or fund is in danger of being lost, removed, or materially injured” (Code of Civil Procedure Section 564(b)(1)); “In an action by a secured lender for the foreclosure of a deed of trust or mortgage and sale of property upon which there is a lien under a deed of trust or mortgage, where it appears that the property is in danger of being lost, removed, or materially injured, or that the condition of the deed of trust or mortgage has not been performed, and that the property is probably insufficient to discharge the deed of trust or mortgage debt” (Code of Civil Procedure Section 564(b)(2)); and “Where a corporation is insolvent, or in imminent danger of insolvency, or has forfeited its corporate rights” (Code of Civil Procedure Section 564(b)(6)).

There are many other specific statutory authorizations throughout the Codes. Examples include: Code of Civil Procedure Section 564(c) (to enable a secured lender to inspect real property for hazardous substances); Code of Civil Procedure Section 708.630(b) (to transfer alcoholic beverage license to satisfy money judgment); Family Code Section 290 (family law cases); and Code of Civil Procedure Section 712.060 (to enforce judgment for possession or sale of property). Receivers also are appointed in post-judgment proceedings to aid in collection efforts for judgment creditors. (Code of Civil Procedure Section 564(b)(3).)

Code of Civil Procedure Section 564(b)(9) also reemphasizes the court’s equitable power to appoint a receiver by providing that one may be appointed “In all other cases where necessary to preserve the property or rights of any party.” Equity receiverships are often instituted by an action brought by a governmental regulatory agency, with the result that the receiver takes possession of all assets for the benefit of all creditors. This type of receiver can be likened to a bankruptcy trustee.

The appointment of a receiver can be a very effective way to protect assets in many types of disputes, pending the outcome of litigation. Nonetheless, appointment of a receivership is a drastic remedy, wresting control of property from the owner’s hands. Thus, “ordinarily if there is any other remedy, less severe in its results, which will adequately protect the rights of the parties, the court should not take property out of the hands of its owners.” Alhambra-Shumway Mines Inc. v. Alhambra Gold Mine Corp., 116 Cal.App.2d 869 (1953). “California rigidly adheres to the principle that the power to appoint a receiver is a delicate one which is to be exercised sparingly and with caution.” Morand v. Superior Court, 38 Cal.App.3d 347 (1974).

The appointment, or the refusal to appoint a receiver, is within the discretion of the trial court. “The rule is established that the appointment of receiver rests largely in the discretion of the trial court and that its action and appointing a receiver or its refusal of an application for the appointment of such an officer will not be disturbed in the absence of a showing that the court’s discretion has been abused.” City and County of San Francisco v. Daley, 16 Cal.App.4th 734 (1993).

Unless the parties file a written consent, a receiver may not be a party, an attorney of a party, a person interested in the action, or a person related to any judge of the court by consanguinity or affinity within the third degree. Code of Civil Procedure Section 566.

The receiver “must be sworn to perform the duties faithfully.” Code of Civil Procedure Section 567(a). The receiver must give an undertaking to the State of California “in such sum as the court or judge may direct.” Code of Civil Procedure Section 567(b).

The receiver’s powers are those specified in the applicable statutes and court orders. The primary source of the receiver’s powers are the court’s orders. See Nulaid Farmers Ass’n v. LaTorre, 252 Cal.App.2d 788 (1967). Because the appointing order is so significant, it should be carefully drafted so as to anticipate the powers and instructions that the receiver may require. The Judicial Council has promulgated form receivership orders for equity and rents-and-profits receiverships. The forms are not mandatory and many receivers and attorneys prefer to use non-form orders.

Typical provisions in an appointing order include the following: the receiver’s power to employ employees and professionals; the receiver’s power to operate and/or liquidate a business; the receiver’s power to enter into contracts or leases; the receiver’s authority to use a locksmith to enter the receivership premises; the receiver’s authority to bring and defend actions; the receiver’s obligation to investigate, report about, and maintain adequate insurance coverage regarding the receivership estate; a provision regarding payment of the receiver’s fees and costs, as well as the fees and costs of other professionals employed by the receiver; and, a provision that the receiver may sell real or personal property of the estate. Code of Civil Procedure Section 568.5. Note that a receiver may not employ an attorney without a specific court order authorizing such employment. California Rule of Court 3.1180.

The court’s order further sets forth the compensation due to the receiver and the frequency of reports he or she must submit to the court regarding the entity it is protecting.

A court order is required to terminate a receivership. Upon court approval of the receiver’s final report and account, the receiver is discharged and his or her bond exonerated. California Rule of Court 3.1184. The court’s order terminating the receivership bars subsequent action against the receiver by all parties who received notice, for the receiver’s failure to properly perform duties. Aviation Brake System Ltd. v. Voorhis, 133 Cal.App.3d 230 (1982).

Receivership orders are enforceable through contempt proceedings. In general, disobedience of receivership orders has increased in recent years, and contempt proceedings in receivership cases has become a more frequent occurrence. When there has not been compliance with a court order, a receiver must consider whether it is appropriate to institute a contempt action.

The contempt proceeding is initiated by the filing of evidentiary affidavits (or declarations) Code of Civil Procedure Section 1211, together with an application for the issuance of an order to show cause. These documents detail the violations of the court’s orders, and must be personally served on the alleged contemnor. Every separate act of disobedience of a court order is a separate contempt and punishable as such. In re Stafford, 160 Cal.App.2d 110 (1958).

There are four elements that must be proved to establish a contempt violation: the issuance of a valid court order; the contemnor’s actual knowledge of the order; the contemnor’s ability to comply with the order; and the contemnor’s willful disobedience of the order. See Conn v. Superior Court, 196 Cal.App.3d 774 (1987).

A common contempt application in a receivership case involves a defendant who fails to turn over funds to the receiver in compliance with a court order. In order to establish a contempt claim in such a case, the receiver must prove that the defendant had funds to turn over to the receiver. It is not enough to simply prove that the defendant disobeyed the order to turn over funds to the receiver. In re Cassil, 37 Cal.App.4th 1081 (1995).

Unlike civil proceedings such as receivership hearings, a contempt proceeding is quasi-criminal. The alleged contemnors are presumed innocent and all of the elements of contempt alleged against the contemnors must be proved beyond a reasonable doubt rather than by a mere preponderance of the evidence. Bennett v. Superior Court, 73 Cal.App.2d 203 (1946). Perhaps most importantly, the alleged contemnor has the right against self-incrimination, and cannot be compelled to testify. In re Witherspoon, 162 Cal.App.3d 1000 (1984). Thus, a receiver (or a party) bringing a contempt action must be able to prove each element to establish the contempt violation without any testimony by the alleged contemnor.

A person guilty of contempt may be fined $1,000 and imprisoned for 5 days for each contempt violation. Code of Civil Procedure Section 1218(a). Imprisonment for contempt is rare. The fines are paid to the state of California, and not to the receivership estate.

A party to an action who is found in contempt may be ordered to pay to the party initiating the contempt proceeding the reasonable attorneys’ fees and costs incurred by the party in connection with the contempt proceeding. Code of Civil Procedure Section 1218(a). These fees and costs usually exceed the statutory fines that are available. Judges are usually willing to award these fees and costs if they are requested. They are not available against non-parties.

 

Workers Compensation Subrogation

 
A claims examiner for a workers compensation carrier receives a voice mail that an employee of their insured, ABC Heating and Air Conditioning, has just suffered catastrophic injuries as a result of an on-the-job accident. The injured employee, a married 31-year-old HVAC technician, has suffered life-threatening injuries after falling from a roof during a routine service call. The injured employee was alone at the time of the accident, and there were no witnesses to the fall. Projected compensation benefits are in the high six-figure range.

What at first blush appears to be a straightforward workers compensation claim may, in fact, be a claim with significant potential for subrogation recovery, provided the carrier can identify a third party who is legally responsible for the employee’s injuries.

Workers Comp Basics

Generally, a worker who is injured in the course and scope of employment may not pursue a direct civil action for damages against the worker’s employer. (See Cal. Lab. Code § 3602.) In exchange for the right to receive workers compensation benefits pursuant to the employer’s payment of such insurance premiums, the employee forgoes any direct right of action against the employer.

However, the liability analysis does not stop there, for in many instances a third party – not the employer – is responsible for all or part of the injuries sustained by the employee. This is when subrogation comes into play.

Subrogation Rights

The state Labor Code confers employers the right to pursue responsible third parties for recovery of any and all workers compensation benefits paid to or on behalf of an injured employee. (See Cal. Lab. Code § 3852.) For purposes of subrogation, workers compensation insurers are considered to be “employers.” (See Cal. Lab. Code § 3852(b).) The employer’s right to reimbursement from any proceeds recovered from a third-party tortfeasor takes first and full priority over any recovery by the injured employee. (Cal. Ins. Guar. Ass’n v. W.C.A.B., 112 Cal. App. 4th 358, 368 (2003).)

When evaluating the subrogation potential of any matter, counsel must assess the conduct of the potentially responsible third party. But that is only the first step. In addition, there must be a thorough review of the conduct of the injured employee, the employer, or both, for though any negligence on their part will not bear on the underlying workers compensation claim, it may drastically impact the subrogation potential against a third party.

Assessing Negligence

The law imposes a general standard of care; everyone is responsible not only for the results of their willful acts but also for any injury occasioned to another by their lack of ordinary care. (See Cal. Civ. Code § 1714 (a).)

Every person also has a duty to avoid exposing themselves to an unreasonable risk of harm. Thus, when the injured party’s conduct causes or contributes to his or her own injury, it is referred to as “comparative negligence,” and it reduces the amount that a third party tortfeasor will have to pay in damages. (See Li v. Yellow Cab Co., 13 Cal. 3d 804 (1975.) This principle is central to workers compensation subrogation claims because an employee’s negligence cannot be imputed to the employer for purposes of reducing the compensation lien. (Kemerer v. Challenge Milk Co., 105 Cal. App. 3d 334, 338 (1980).)

When both an employee and the employer seek relief from a third party, a delicate balance exists. In these cases, although the injured worker and his or her employer are pursuing the same defendant(s), they seek different remedies. The employee requests damages; the employer, however, seeks recovery of workers compensation benefits paid to or on behalf of the employee as a result of his or her injury. The law gives the employer a lien for those benefits, and the lien may be asserted in a number of different ways, each of which is discussed below.

As noted above, an injured party’s negligence may reduce the ultimate award of damages. In the subrogation context, some lawyers wrongly assume that any negligence attributed to the employee is automatically imputed to the employer for purposes of reducing the employer’s lien. But that is not so. Although an employee’s negligence will reduce his or her entitlement to damages, the employee’s negligence is not imputed to the employer to lower the amount of the compensation lien, because doing so would, in effect, grant the third-party tortfeasor a double deduction for the same employee negligence. (Kemerer, 105 Cal. App. 3d at 337-339.)

However, though employee negligence will not directly reduce the employer’s lien, it can have the indirect effect of reducing the “settlement pool” from which the lien will be satisfied. This result occurs because the total damage award will be reduced by any allocation of fault to the injured worker. Furthermore, an employer seeking reimbursement must first pay workers compensation benefits in an amount equal to the employer’s own percentage of fault multiplied by the injured worker’s total civil damages before it may recover any remaining portion of its lien from a culpable third-party defendant. (DaFonte v. Up-Right, Inc., 2 Cal. 4th 593, 599 (1992).) This mathematical calculation is commonly referred to as the “employer negligence threshold.”

An example: Assume the injured worker is awarded $100,000 at a civil trial. The worker is assigned 20 percent comparative negligence. The employer, whose lien totals $20,000, is assigned 10 percent fault. The two defendants at trial are each allocated 35 percent fault.

Under this scenario, the total award of $100,000 is reduced by $20,000, which represents the plaintiff’s negligence ($100,000 x .20 = $20,000). The employer’s “threshold” is then quantified by multiplying the amount of employer negligence (10 percent) by the injured worker’s total civil damages ($80,000), yielding a “threshold” of $8,000. Only the benefits paid above this “threshold” (i.e., $20,000 – $8,000 = $12,000) are recoverable by the employer. If the calculation leads to a result in which the employer has not paid benefits exceeding the computed “threshold,” there will be no lien recovery for benefits paid.

With the passage of Proposition 51 in 1986 (Cal. Civ. Code § 1431.2), a comparative-fault system was adopted in California that permits a concurrently negligent employer to obtain reimbursement for workers compensation payments made in excess of the percentage of the employer’s fault or liability. (Associated Constr. & Eng’g Co. v. W.C.A.B., 22 Cal. 3d 829 (1978).) Although a culpable defendant is only liable for its own percentage of noneconomic damages, joint and several liability exists for all economic damages, including the compensation lien. (DaFonte, 2 Cal. 4th at 600.)

Pursuant to Labor Code section 3864, third-party tortfeasors generally are barred from receiving indemnification from concurrently negligent employers. However, pursuant to Prop. 51, judgments against third parties may take into account the employer’s negligence, and the judgment may be reduced accordingly, thus affecting the amount of reimbursement to the employer.

Passive Employer Negligence

Employers may be negligent even in the absence of affirmative misconduct. Allegations of employer negligence often reference improper or inadequate training, supervision, and/or the provision of faulty or inadequate equipment or tools. Thus, even when the employer has not engaged in affirmative negligent conduct, a seasoned plaintiffs or defense counsel can make the case that the employer’s passive conduct – failing to properly train or supervise the injured employee – contributed to the accident such that the employer’s lien should be reduced in an amount commensurate with its negligence.

With these basic concepts in mind, it is now appropriate to identify and discuss several common mistakes made by counsel and workers compensation carriers in the area of subrogation.

– Overlooked potential. When faced with a factual scenario such as the one presented at the outset of this article, it is entirely possible that the claims examiner may conclude that no third party is at fault, or that it would be impossible to prevail in a civil suit absent witnesses or evidence, even if a potentially responsible third party is identified. However, as will become apparent, these conclusions may be premised upon a faulty or incomplete understanding of the applicable evidentiary standards that must be satisfied to prevail in an action to recover the employer’s lien.

The following hypothetical arises from an actual incident. Subrogation counsel was contacted on the day of an incident in which an employee was injured. On advice of counsel, a prompt investigation (consisting of a site inspection, photographs of the accident scene, and interviews with the employer, and others) revealed that unbeknownst to the customer (who owned the building), a tenant had placed a metal guard over the exterior roof ladder only days before the accident occurred in an attempt to prevent teenagers from accessing the roof after business hours. The tenant failed to advise anyone of this change in the condition of the premises. As a result, the employee had to gain access to the roof from inside another tenant’s store. The inside access was subsequently locked by mistake, trapping the worker on the roof. The accident occurred when the worker attempted to descend the roof using the guarded exterior ladder after having been trapped for several hours.

What first appeared to be a claim with no obvious subrogation potential evolved into a case in which it was possible to demonstrate that third parties caused or significantly contributed to the worker’s injury by (1) improperly guarding the exterior ladder (a code violation); (2) failing to advise the building owner, other tenants, or service personnel of the change in condition to the property; (3) trapping the worker on the roof by inadvertently locking the inside access; and (4) by installing what amounted to a tripping hazard. The lesson: In any claim, investigate thoroughly and studiously analyze the potential existence of third-party liability.

– Delay. It is settled law that when an employee receives workers compensation benefits necessitated by third-party negligence, the employer has three options to pursue recovery of its lien from the third party. (See Fremont Comp. Ins. Co. v. Sierra Pine, Ltd., 121 Cal. App. 4th 389, 396 (2004).) The first option is for the employer to file its own independent action against the negligent third party. Second, the employer may intervene in the employee’s existing civil personal injury suit. And finally, if there does not appear to be any employer negligence, the employer may simply file a notice of lien in the injured worker’s civil action. (This latter procedure comes with a caveat. An employer who files a notice of lien is not deemed to be a party to the employee’s suit. As such, the employer exercises no control over the case. If allegations of employer negligence arise and are proven, the employer is powerless to refute them.)

The statute of limitations for an employee or employer to commence suit arising out of an employee’s personal injury is two years. (Cal. Code Civ. Proc. § 335.1.) The statute begins running from the time of the employee’s injury, not from the time that benefits are paid to the injured worker by the compensation carrier. There is no time limit governing when an employer may intervene in the employee’s existing civil lawsuit. However, to the extent the employer intervenes late in the action, the injured employee’s attorney may be able to argue that to the extent his efforts have aided the employer in proving the negligence of a third party, a portion of his fees should be paid out of the employer’s lien recovery. (Cal. Lab. Code § 3856.)

Many compensation carriers make the mistake of waiting for the injured worker to commence suit and/or perform the necessary investigation. But regardless of who commences the action, delay is the enemy of subrogation recovery. That’s because memories fade, witnesses disappear, documents become lost or misplaced, and accident scenes change. Failure to act promptly and safeguard evidence severely decreases the prospects for a successful suit, be it for damages or recovery of the lien.

– Backseat mentality. Too often, compensation carriers adopt what can best be described as a “backseat” mentality. The employer, either by design or inaction, assumes a secondary role, relying on the other parties to develop the facts, evidence, and arguments that will form the basis for the action. By so doing, the employer often finds itself in a position where it cannot exert any control. The practical result is that the other litigants treat the employer as an afterthought; moreover, a “nonparticipatory” employer sends a message that it lacks confidence in the case, or worse, the case is not to be taken seriously. Consequently, the employer may lose leverage during settlement negotiations.

– Penny-wise, pound-foolish. Subrogation is necessarily a study in economics. The employer’s recovery is limited to the actual amounts paid to the injured employee and cannot account for increases in premiums or losses of profit. (Fischl v. Paller & Goldstein, 231 Cal. App. 3d 1299, 1304 (1991).)

All expenditures, recoveries, and settlements in pursuit of subrogation are evaluated in light of the size of the lien and future exposure to the carrier. A Pyrrhic victory in the form of a legal bill that rivals or surpasses the lien rarely results in warm feelings at company headquarters, and for good reason. Such a result evidences a lack of appreciation for the economics of subrogation; counsel should pursue only cases that are good candidates for significant subrogation recovery. Each case should promise an economic return that justifies the attorney’s fees and costs necessary to achieve it.

– Inexperienced counsel. The failure to retain a seasoned litigation attorney is the single biggest mistake compensation carriers make in the subrogation arena. As the foregoing discussion illustrates, this area of law is complex and requires crossover knowledge of workers compensation and civil tort law. But make no mistake, subrogation cases are litigation matters, not workers compensation claims. Accordingly, experienced and knowledgeable litigation counsel should manage them. Engaging seasoned, trial-ready subrogation counsel is the single most important step in identifying and maximizing subrogation recovery.

 

Accommodating for Disabilities

What happens when a blind tenant with a seeing-eye dog tries to move into an apartment complex with a strict “no pets” policy?  What if a tenant who walks with difficulty wants a reserved parking space next to her apartment, but she is at the bottom of the waiting list for spaces?  What are the options for a tenant who is being evicted for minor damage he caused to his apartment when he had an emotional breakdown?  These are among the situations when tenants with disabilities can request “reasonable accommodations.”

Perhaps the tenant walked into your office.  Or the landlord just received one of these requests and asks you what to do.  Or maybe you have a long-time client who is a property owner and wants to be updated on the latest legal developments.  In any of these situations, you will need to know what an accommodation is, who is entitled to one-and how to determine whether such a request is reasonable.

Reasonableness Defined
A reasonable accommodation is defined by the fair housing laws as a change in the landlord’s rules, policies, or practices that is necessary to afford a person with a disability an opportunity to use and enjoy a dwelling.  (Fair Hous.  Amendments Act (FHAA), 42 U.S.C. § 3604(f)(3)(B); Cal. Fair Emp. and Hous.  Act (FEHA), Cal. Gov’t Code §§ 12927(c)(1), 12955.) But applying these laws is often difficult.

The Dance of Analyzing a Request
The five factors in the acronym DANCE encapsulate the elements of an accommodation case as outlined by the Ninth Circuit in the Mobile Home Park cases.  (United States v. California Mobile Home Park Mgmt., 29 F.3d 1413 (1994), appeal after remand, 107 F.3d 1374 (1997).) And in truth, the back and forth interaction between a tenant and landlord regarding accommodation requests often resembles a dance.

“D” is for disability.  To qualify for an accommodation, a tenant must have a disability-a mental, developmental, or physical impairment that substantially limits one or more major life activities, such as walking, seeing, hearing, working, learning, or caring for himself or herself.  (42 U.S.C. § 3602(h); Cal. Gov’t Code § 12955.3.) This includes all recognized mental health conditions, including personality disorders.  (United States v. Massachusetts Indus. Fin. Agency, 910 F. Supp. 21 (D. Mass. 1996).) The statutes protect those with alcoholism and past, but not current, drug addiction.  This statutory distinction leads to confusion over the timing of “past” and “current” drug use.  The few courts that have addressed the issue offer a little guidance: a year ago is past, six weeks ago is considered current.  (United States v. Southern Mgmt. Corp., 955 F.2d 914 (4th Cir. 1992); Fowler v. Borough of Westville, 97 F. Supp. 2d 602 (D.N.J. 2000).) Perhaps future litigation will specify a magic line somewhere in the middle.

A landlord who doubts that a tenant requesting the accommodation has a disability has an obligation to affirmatively ask for verification.  (Hubbard v. Samson Mgmt. Corp., 994 F. Supp. 187 (S.D.N.Y. 1998).) This is an exception to the general fair housing rule that housing providers may not ask any questions about whether an applicant or tenant has a disability.  (24 C.F.R. § 100.202(c).) As verification, housing providers can accept a doctor’s note stating the tenant’s condition is a disability, unless there are clear reasons to question the note.

“A” is for accommodation request.  To trigger these fair housing law requirements, a tenant must communicate to the housing provider the need for an accommodation because of some medical condition.  The tenant need not use the magic words “reasonable accommodation,” nor even make the request in writing, though a written request is wise.  In one case, for example, a tenant told the manager that he did not have to get rid of his cat because he was disabled, which was found to be sufficient notice for the landlord to begin the accommodation evaluation.  (HUD v. Dutra, 1996 WL 657690 (HUD ALJ 1996).) However, the landlord is not required to guess that the tenant needs an accommodation.  (See, HUD v. Courthouse Square Co., 2001 WL 953792 (HUD ALJ 2001).)

The request must be a change to rules or practices.  If the tenant is requesting a physical change to his or her apartment, that is a “modification,” not an accommodation.  Although the analysis is similar, in private housing, the tenant must pay the cost of the modification and restore the premises at the end of the tenancy if the modification would make the apartment less marketable.  (42 U.S.C. § 3604(f)(3)(A); Cal. Gov’t Code § 12927(c)(1).) Debate continues about when a physical change to the common areas of the complex is an accommodation and when it is a modification.  But courts have ruled that physically marking a handicapped parking space is an accommodation.

“N” is for necessary.  The tenant must need the accommodation because of his or her disability.  There must be a causal nexus between the symptoms of the disability and the accommodation requested-and many plaintiffs have lost their cases by not making this connection clear.  (Gavin v. Spring Ridge Conservancy, Inc., 934 F. Supp. 685 (D. Md. 1995) (plaintiff did not show why a normal-size shed was insufficient to house his medical supplies nor why he needed a bigger shed as an accommodation).)

“C” is for cost.  An accommodation that imposes an undue financial or administrative burden on the landlord is not deemed reasonable.  (Green v. Housing Authority, 994 F. Supp. 1253 (D. Ore. 1998).  The key word here is “undue,” which will be different for a huge corporate-owned complex than for a “mom and pop” fourplex. For example, one court found that requiring a landlord to replace an elevator, which would cost a minimum of $25,000, was not reasonable. (Rodriguez v. 551 West 157th Street Owners Corp., 992 F. Supp. 385 (S.D.N.Y. 1998).) However, the Ninth Circuit has made clear that landlords must absorb reasonable costs. (Giebeler v. M&B Associates, 343 F.3d 1143, 1152 (9th Cir. 2003).

“E” is for effecting a fundamental change. An accommodation that would require a landlord to fundamentally alter the nature of his or her business is not reasonable. For example, a landlord who does not want to participate in government programs may not be required to accept Section 8 certificates as an accommodation because that would fundamentally change the nature of the landlord’s housing business. (Salute v. Stratford Greens Garden Apts., 918 F. Supp. 660 (E.D.N.Y. 1996), aff’d, 136 F.3d 293 (2nd Cir. 1998).

If a tenant has a disability, has made an accommodation request, and has demonstrated that the accommodation is necessary, and the landlord cannot show that the accommodation would impose an undue cost or effect a fundamental change, the landlord must grant the accommodation. Failing to grant an accommodation that meets all these requirements constitutes illegal discrimination. If the accommodation requested does not meet all the requirements-if it costs too much, for example-the landlord should inform the tenant why it is being denied, so the tenant can propose an alternate, less costly accommodation. This is the accommodation dance.

Examples of Accommodations
In the years since these requirements have existed, the courts have addressed only some of the potential accommodation scenarios. A number of courts have considered claims relating to accommodations for service animals. (Green v. Hous. Auth., 994 F. Supp. 1253 (D. Or. 1998); Bronk v. Ineichen, 54 F.3d 891 (7th Cir. 1996); see also, 24 C.F.R. § 100.204(b).) Because of the relatively small impact on the landlord, courts have continually required landlords to make exceptions to “no pet” policies to allow service animals. Service animals include not only seeing-eye dogs, but also companion animals that provide emotional support to people who have mental disabilities. (Majors v. Hous. Auth., 652 F.2d 454 (5th Cir. 1981); Whittier Terrace Assoc. v. Hampshire, 532 N.E.2d 712 (Mass. App. 1989).

Parking spaces are another hot topic. Landlords are often uncertain of their options when a disabled person who needs a space is lower on the waiting list than nondisabled tenants who may have been waiting for years. However, the law is clear that landlords must move the disabled person who needs the space to the top of the waiting list. (Shapiro v. Cadman Towers, 844 F. Supp. 116 (E.D.N.Y. 1994); see also, Jankowski Lee & Assoc. v. Cisneros, 91 F.3d 891 (7th Cir. 1996); 24 C.F.R. § 100.204.) Not having a close space is a mere inconvenience for the nondisabled tenant; however, it is often an insurmountable barrier for the disabled tenant.

The Ninth Circuit has recently addressed accommodations relating to financial consequences of a disability. In Giebler v. M&B Assoc., a disabled applicant receiving Social Security disability benefits did not meet the landlord’s “three times the rent” income requirement despite a good rental payment history. (343 F. 3d 1143, 1145 (2003).) He requested that his financially qualified mother be allowed to co-sign as an accommodation of his disability, which the landlord refused to do. On appeal, the Ninth Circuit found that Giebler’s inability to meet the income requirement was directly caused by his disability because he would have met the minimum requirements based on his predisability income. The court referred to a recent U.S. Supreme Court case, U.S. Airways v. Barnett (535 U.S. 391 (2002)), holding that barriers for both disabled and nondisabled people, such as seniority systems, can be the subject of reasonable accommodations under the Americans With Disabilities Act or ADA (42 U.S.C. § 12182). Though this decision somewhat expands the necessity “nexus” discussed previously to include needs stemming from the financial consequences of being disabled, the reasonableness factors remain. Giebler had a proven rental payment history and was offering the landlord additional security of a co-signor with little cost required. On the other hand, courts are very unlikely to require a landlord to lower rent as an accommodation for a tenant on disability benefits.

The accommodation issue may also arise when a tenant is being evicted for behavior related to his or her disability. In one case, for example, a person with schizophrenia had hallucinations and, as a result, hit the wall repeatedly with a broomstick, causing minor damage. (Citywide Assocs. v. Penfield, 2 FH-FL 18,079 (Mass. Hous. Ct. 1989).) The landlord, who normally evicts tenants who cause this kind of damage, proceeded with an eviction. The tenant explained that the damage was caused by the symptoms of her disability and agreed to participate in a new counseling program. The court determined that the landlord must make an accommodation by stopping the eviction. Tenants whose behavior seriously disturbs neighbors will be eligible for accommodations only if they can show that the disturbance has stopped or will be ameliorated.

The FHAA specifically states that housing providers are not obliged to rent to tenants who pose direct threats of harming people or causing substantial property damages. (42 U.S.C. § 3604(f)(9).) However, the courts have held that landlords must consider accommodations for all behavior caused by a disability, even threats or violence. (Roe v. Hous. Auth., 909 F. Supp. 814 (D. Colo. 1995); Roe v. Sugar River Mills Assoc., 820 F. Supp. 636 (D.N.H. 1993).) At the same time, the greater the harm caused by the behavior, the greater the assurances of change must be in order before the accommodation will be considered “reasonable.”

The Long Reach of the Law
Any part of the application procedure, tenancy, or eviction process can be the subject of a reasonable accommodation request. Although the statutory language refers to accommodations that allow the tenant to “use and enjoy the dwelling,” accommodations have repeatedly been considered valid even when a tenant is moving out of an apartment. Courts have sanctioned accommodations such as releasing a tenant from a lease early (Samuelson v. Mid-Atlantic Realty, 947 F. Supp. 756 (D. Del. 1996)), or postponing an eviction action (Anast v. Commonwealth Apts., 956 F. Supp. 792 (N.D. Ill. 1997).

Also, a tenant can bring up an accommodation request at any time in the eviction process. If a landlord knows of a tenant’s disability and need for accommodation before the tenant is physically evicted-even if a notice to vacate has already been given-the landlord must consider the accommodation. (Radecki v. Joura, 114 F.3d 115 (8th Cir. 1997).)

Because accommodations depend on the specific symptoms of a tenant’s disability and the requirements of the housing, no exhaustive list is possible. For example, courts have required landlords to give tenants with disabilities more time to comply with fire code requirements (Schuett Inv. Co. v. Anderson, 386 N.W.2d 249 (Minn. App. 1986)); to move disabled tenants to first floor apartments (Roseborough v. Cottonwood Apts., 1996 WL 490717 (N.D. Ill. 1996)); and to keep sidewalks clear of snow for the safety of the disabled tenant (Lindsey v. Nob Hill Partnership, 539 N.W.2d 134 (Wis. Ct. App. 1995).)

The main two laws in this area are the federal Fair Housing Amendments Act (42 U.S.C. § 3601) and California’s Fair Employment and Housing Act (Cal. Gov’t Code § 12955). There is also a California statute specifically addressing accommodations (Cal. Civ. Code § 54.1) and federally funded housing providers are also covered by Section 504 of the Rehabilitation Act (29 U.S.C. § 794).

Looking at these laws in combination, almost all landlords or lessors are required to make reasonable accommodations. The only exception is for owners who rent out only one room in a house they occupy. (Cal. Gov’t Code § 12927(c)(2)(A).) Condominium homeowners’ associations and mobile home parks are also obligated to make reasonable accommodations, even when the accommodation may violate an association’s covenants or affect commonly owned areas of the property. (Gittleman v. Woodhaven Condo. Ass’n, 972 F. Supp. 894 (D.N.J. 1997).)
People who run some types of organizations-for example, residential drug treatment, transitional housing programs, board and care facilities-feel that they are providing services rather than housing. However, because of the fair housing statutes’ broad definition of “dwelling,” almost anywhere that a person spends the night is covered. (42 U.S.C. § 3602(b); Cal. Gov’t Code § 12927(d).) This includes nursing homes (Hovsons v. Township of Brick, 89 F.3d 1096 (3rd Cir. 1996)); homeless shelters (Turning Point v. City of Caldwell, 74 F.3d 941 (9th Cir. 1996), and timeshares (Louisiana ACORN Fair Housing v. Quarter House, 952 F. Supp. 352 (E.D. La. 1997).)

Some housing providers worry that granting a requested accommodation will get them in trouble with government authorities, such as code enforcement agencies, zoning boards, HUD, or fire inspectors. These landlords feel that they are stuck between the proverbial rock and hard place. However, these governmental agencies are obligated under the both the fair housing laws and the ADA to themselves make accommodations. A landlord may ask for an accommodation from these agencies on behalf of disabled tenants and has standing to sue if he or she is harmed by the denial of the accommodation. (San Pedro Hotel v. City of Los Angeles, 159 F. 3d 470 (9th Cir. 1998).)

Litigation Strategy
Reasonable accommodation cases present a perfect opportunity for preventive work. Landlords with written accommodation policies and procedures rarely find themselves in trouble. Attorneys who are consulted early can advise their clients about what accommodations to offer before irreparable harm occurs.

Within one year of an accommodation denial, tenants can file administrative claims with HUD’s fair housing office or the Department of Fair Employment and Housing (DFEH). These agencies investigate claims, attempt conciliation, and, if discrimination is found, proceed to enforcement-typically a hearing before an administrative law judge. The administrative processes provide ample opportunities for negotiation, especially since the investigation stage can be quite lengthy. However, unlike employment discrimination claims, filing with an administrative agency is not an exhaustion requirement before litigation. Notably, the California Supreme Court recently decided that DFEH has the authority to award emotional distress damages without running afoul of the judicial powers clause. (Konig v. FEHC, 28 Cal. 4th 743 (2002).)

Of course, some accommodation cases will proceed to litigation. The statute of limitations for both FHAA and FEHA is two years-with an open question about whether the two years is from the first time or the last time the request is made. The statute is tolled for any time a claim was with HUD or DFEH. In reality, these cases are almost never resolved by a motion to dismiss because of the requirement of the highly factual “reasonableness” determination. For the same reason, defendants’ summary judgment motions require strong evidentiary support that one of the necessary elements is absent.

At trial, the parties must present evidence regarding the elements described above. Clearly, the plaintiff must prove that he or she has a disability and therefore needs the accommodation requested. The Ninth Circuit has recently shed more light on the unresolved issue of which party bears the burden regarding an accommodation’s reasonableness. Depending on whether a court follows precedent of Section 504 of the Rehabilitation Act or the ADA, the plaintiff bears the initial burden of showing that the accommodation either is possible (Section 504) or seems reasonable on its face (ADA). (Giebeler, 343 F.3d at 1156.) If the plaintiff meets this burden, the defendant bears the burden of showing that the accommodation is not reasonable in the particular case.

If an accommodation case proceeds to judgment for the plaintiff, damages can include injunctive relief and compensatory damages-including emotional distress, as well as punitive damages, and attorney fees. (42 U.S.C. § 3613.) As with other civil rights statutes, the attorney fee provision is not reciprocal.

 

Liquidated Damages

 
Lawyers often insert liquidated damages clauses into contracts, intending to specify the amount of damages that one party will receive if the other party breaches the agreement. These clauses can be efficient mechanisms for dispute resolution, eliminating the need to prove damages and, thereby, streamlining litigation (if not avoiding it altogether). However, California law places several restrictions on the enforceability of such provisions, with different requirements under different circumstances.

General Rules

Whether or not a liquidated damages clause is enforceable is a question of law. (Harbor Island Holdings v. Kim, 107 Cal. App. 4th 790, 794 (2003).) The question likely will turn on the facts of the case but also on several governing statutes that apply to specific types of transactions. But first a bit of background.

The California Civil Code mandates that a liquidated damages clause is valid unless a party establishes that it was “unreasonable under the circumstances existing at the time the contract was made.” (Cal. Civ. Code § 1671(b).) However, this rule does not apply in cases in which another applicable statute prescribes a different standard. (See Cal. Civ. Code § 1671(a).)

A key exception is when the contract concerns the purchase or rental of personal property; a service used primarily for personal, family, or household purposes; or a residential lease. In those cases, a liquidated damages clause is void except when “from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.” (See Cal. Civ. Code § 1671(c) and (d).)

The amount of liquidated damages stated in a contract also must represent a reasonable endeavor to estimate fair compensation for the loss sustained. If the stated amount is “designed to substantially exceed the damages suffered, and its primary purpose is to serve as a threat to compel compliance through the imposition of charges bearing little or no relationship to the amount of actual loss,” then the purported liquidated damages clause will be an invalid attempt to impose a penalty. (Utility Consumers’ Action Network, Inc. v. AT&T Broadband, 135 Cal. App. 4th 1023, 1029 (2006).)

In the Utility Consumers case, the court upheld the late fee in Internet cable service contracts (in which the amount was conceded to be reasonable), ruling that a company does not have to negotiate the late fee individually with each customer; the fee may be unilaterally set by one of the parties to a contract. (Utility Consumers, 135 Cal. App. 4th at 1025.)

In another case, the court of appeal struck down early-termination fees in consumer cell phone contracts, holding that the cellular telephone carrier (in this case, Sprint), failed the “reasonable endeavor” test because it did not undertake any effort to approximate the damages that would flow from a consumer’s breach of contract. (Cellphone Termination Fee Cases, 193 Cal. App. 4th 298 (2011).)

Key Factors

Some cases are more instructive than others. In one instance, a federal district court upheld a liquidated damages clause that forced a buyer to forfeit a deposit for the purchase of a vintage car. The buyer had failed to pay the balance due, and the dealer sold the car to someone else for more money. The buyer sued for return of his deposit, but the court, after analyzing several factors, upheld the liquidated damages clause. The court quoted from the Law Revision Commission Comments to Civil Code section 1671 (“the amount of damages actually suffered has no bearing on the validity of the liquidated damages provision”) and noted that the amount in question was a standard figure in vintage-car sales contracts – a key fact that supported a finding of reasonableness.

The court also cited other factors, such as “the relative equality of the bargaining power of the parties” and whether lawyers represented the parties when the contract was made. A crucial fact was that the buyer was sophisticated in the practices of buying and selling high-end vintage cars. In the overall context, the court observed that the amount of liquidated damages reasonably reflected the defendant’s risk, as well as the damages that could have been anticipated at the time of contracting. (See Edwards v. Symbolic International, Inc. (2009 WL 1178662 (S.D. Cal.).)

However, in a different situation – involving real estate – the sophistication of the parties proved to be irrelevant. In Kuish v. Smith (181 Cal. App. 4th 1419 (2010)), a California appellate court held unenforceable a nonrefundable-deposit provision in a $14 million residential purchase contract. Both parties were deemed sophisticated, and the buyer backed out while the seller proceeded to sell the property for more money to a third party. But the result was far different from the vintage-car case.

In fact, the nonrefundable-deposit provision did not even appear to comply with Civil Code section 1675, which covers liquidated damages clauses in residential real estate purchase contracts. Interestingly, the Kuish court did not base its decision on section 1675. Rather, it noted that in a rising real estate market, where the property resells for more than the original purchase price, the seller has not sustained a loss. In that scenario, a nonrefundable deposit would constitute an unenforceable penalty. (181 Cal. App. 4th at 1427.)

To further demonstrate the point that context matters, another court held that a late charge of 10 percent in a promissory note was unenforceable when tacked onto a large balloon payment due upon the note’s maturity. Although the regular installment payments (interest only) were $6,146.66 per month, the balloon was $776,146.66.

The 10 percent fee produced markedly different results, depending on the size of the missed payment. “A late charge provision covering administrative expenses that amounts to $614.67 for one late payment and $77,614.67 for another,” said the court, “is not a reasonable attempt to estimate actual … costs incurred, whether or not it is customary in the industry.” (Poseidon Development, Inc. v. Woodland Lane Estates, LLC, 152 Cal. App. 4th 1106, 1116 (2007).)

Excess Damages

Some clauses provide for “per day” or “per month” damages. In such cases parties need to be careful, lest a court conclude that a clause that runs on forever is unreasonable. That is exactly what happened when the court struck down a liquidated damages provision in a lease that provided a late fee of $2,500 per day to the tenant if the landlord could not deliver completed premises by a specified deadline. Because the delay damages could continue in perpetuity, they imposed potentially unlimited damages, and therefore bore no rational relationship to the actual harm expected to flow from the breach. (See Dollar Tree Stores Inc. v. Toyama Partners LLC, 875 F. Supp. 2d 1058, 1073 (N.D. Cal. 2012).)

As many construction contracts contain “per day” provisions for delay damages, parties should carefully consider inserting a reasonable cap on delay damages in order to protect the concept from attack. (See also El Centro Mall, LLC v. Payless Shoesource, Inc., 174 Cal. App. 4th 58 (2009) (court of appeal upheld a 10 cents per day per-square-foot liquidated damages provision against a tenant for breaching its covenant to stay open for business).)

No Penalties

Closely related to the above line of reasoning is a code section that allows a party to be relieved from a “forfeiture” if full payment is made to the other party, provided there has been no “grossly negligent, willful, or fraudulent breach of duty.” (See Cal. Civ. Code § 3275.) In essence, this rule means that a liquidated damages clause cannot amount to a penalty.

A case in point is Ridgley v. Topa Thrift (17 Cal. 4th 970, 979 (1998)). In that instance, the California Supreme Court held that a prepayment provision in a loan document constituted an unenforceable penalty because it applied only when the borrower was late with an interest payment; the liquidated damages were to be imposed in addition to a stipulated 10 percent late-payment fee. The court analyzed the interplay between Civil Code sections 3275 and 1671, noting that for a liquidated damages provision to be enforceable, it must bear a “reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach.” The court then went further, commenting that “[t]he characteristic feature of a penalty is its lack of proportional relation to the damages which may actually flow from the failure to perform under a contract.” (Ridgley, 17 Cal. 4th at 977.) In the Ridgley case, the prepayment fee was approximately $113,000, which was equal to six months of interest. The court noted that the lender offered no plausible argument that the prepayment fee resulted from a reasonable endeavor to estimate fair compensation for any loss for late payment. (Ridgley, 17 Cal. 4th at 979.)

Conversely, a bankruptcy court upheld a $364,578 stipulated judgment against parties who failed to withdraw a bankruptcy claim by a deadline specified in a settlement agreement. (In re VEC Farms, LLC, 395 B.R. 674 (N.D. Cal. 2008).) The court declined to follow Sybron Corp. v. Clark Hosp. Supply Corp. (76 Cal. App. 3d 896 (1978)), which held that a settlement agreement calling for installment payments totaling $72,000 and allowing entry of a stipulated judgment for $100,000 upon any default was an unenforceable penalty.

Residential Transactions

Special rules govern liquidated damages clauses in contracts for the purchase of real estate containing up to four residential units, where the buyer intends to occupy one of the units as his or her residence. (Cal. Civ. Code § 1675(a).) To be valid, the liquidated damages provision must be separately signed or initialed and in at least 10-point bold type or 8-point bold and red type. (See Cal. Civ. Code § 1677.)

In general, subject to these prerequisites, as long as the liquidated damages provision does not exceed 3 percent of the purchase price the provision “is valid unless the buyer establishes that the amount is unreasonable as liquidated damages.” (Cal. Civ. Code § 1675(c).) Conversely, if the amount paid exceeds 3 percent of the purchase price, the provision is invalid unless the party seeking to uphold it establishes that the amount is reasonable. (Cal. Civ. Code § 1675(d).)

Reasonableness is determined by taking into account the circumstances existing at the time the contract was made and the price and other terms and circumstances of any subsequent sale made within six months of the buyer’s default. (Cal. Civ. Code § 1675(e).) Note, however, that for the initial sale of newly constructed condominium units within a project of ten or more residential units, a special rule applies that allows the seller to retain more than 3 percent under certain circumstances. (Cal. Civ. Code § 1675(f).)

These requirements have teeth. Indeed, one court held that when a minor delay in the deal triggered liquidated damages amounting to approximately 8.5 percent of the purchase price, the damages were unenforceable – even though the liquidated damages clause was contained in a court-approved settlement agreement that came into existence following specific performance litigation. (See Timney v. Lin, 106 Cal. App. 4th 1121, 1129 (2003).) Because the designated damages exceeded 3 percent of the purchase price, the liquidated damages clause was presumed invalid under section 1675(d). The fact that it was in a settlement agreement made no difference. Another case involved a buyer who failed to close escrow and sued to recover the deposit. The agreement limited liquidated damages to 3 percent of the purchase price and required any excess deposit to be returned to the buyer. A counteroffer provided the deposit would be released to the seller upon removal of contingencies as “nonrefundable option monies.” The court concluded that the parties intended to enter into a purchase agreement, not an option, and ordered the portion of the deposit exceeding 3 percent of the purchase price to be returned to the buyer. (Allen v. Smith, 94 Cal. App. 4th 1270, 1279 (2002).)

The lesson here is straightforward: In a case involving a residential sale, the parties should limit the total liquidated damages to no more than 3 percent of the purchase price in order to benefit from the statutory presumption of validity.

Commercial Real Estate

The rules are different in the commercial context. Pursuant to the code, a liquidated damages clause in a nonresidential real estate purchase contract is presumed valid if the provision is separately signed or initialed by each party and, if contained in a printed contract, it is set out in at least 10-point bold type or in contrasting red print in at least 8-point bold type. Even so, if the party seeking to invalidate the clause establishes that the provision was unreasonable under circumstances existing at the time the contract was made, a court can still strike it down. (See Cal. Civ. Code § 1676 (which references sections 1677 and 1671).)

In Hong v. Somerset Associates (161 Cal. App. 3d 111 (1984)), the court upheld a liquidated damage clause in an apartment building-purchase contract. The designated damages were $25,000 in a transaction that called for a purchase price of $1,325,000 (slightly less than 2 percent of the purchase price).

One should note that the statutes dealing with liquidated damages in real estate purchase contracts do not affect a party’s right to obtain specific performance. (See Cal. Civ. Code § 1680.)

Beware of Context

When drafting or analyzing a liquidated damages clause in a contract governed by California law, counsel should always remember that different rules apply, depending on the circumstances. However, keep in mind two fundamental guidelines in every case. First, a liquidated damages provision should be reasonable at the time it is drafted. Second, the greater the effort made to earnestly determine a fair measure of damages – as opposed to simply picking an arbitrary number – the better the chances the clause will pass judicial scrutiny.

Even though the rules that govern them are complex, liquidated damages clauses are useful. As one court observed: “liquidated damages do serve an important function. They remove the uncertainty factor from determining damages from a breach of contract and reduce litigation.” (Utility Consumers, 135 Cal. App. 4th at 1038.) Compliance with statutory mandates will help assure that these goals remain within reach.

 

Unlawful Detainer

Unlawful detainer is a narrowly tailored procedure designed to expeditiously resolve landlord-tenant disputes involving right to possession of rental property. The primary purpose of unlawful detainer cases is to determine the right to possession of rental property, forfeiture of the lease or rental agreement, and secondarily, to determine any past due rent and damages for the tenant’s “holdover.”

The objective of this article and self-study test is to introduce attorneys and bench officers unfamiliar with this procedure to common issues relating to the trial of these cases.

Unlawful detainer trials are given precedence in trial setting. The right to an expedited hearing is part of the statutory scheme that replaced the common law rights and remedies of landlords, which included the right to enter and expel the tenant by force. Childs v. Eltinge, 29 CA3d 843 (1973).

Either the plaintiff or the defendant can request that the case be set for trial by filing the Judicial Council form UD-150. Code of Civil Procedure Section 1179a. The trial must be held not later than the 20th day following the date that the request to set the time of the trial is made. Code of Civil Procedure Section 1170.5(a).

The court may extend the period for trial upon the agreement of all parties. Code of Civil Procedure Section 1170.5(a). But, if the plaintiff does not agree to a continuance, the court may condition any continuances on the defendant paying rent into an escrow account for so long as the defendant remains in possession pending the termination of the action. This must be based on the court “finding that there is a reasonable probability that the plaintiff will prevail in the action.” Code of Civil Procedure Section 1170.5(c).

Unless good cause is shown, an extension of time for trial may not exceed 10 days without the consent of the adverse party. Code of Civil Procedure Section 1167.5.

The availability of preferential trial setting is eliminated if the defendant no longer occupies the property. Once possession of the property has been delivered to the lessor, the unlawful detainer proceeding converts to an ordinary civil action for damages. Code of Civil Procedure Section 1952.3.

The parties to an unlawful detainer case have the right to a jury trial unless jury is waived. Code of Civil Procedure Sections 1171 and 631. A party waives the right by failing to appear at trial; by written consent filed with the clerk or judge; by oral consent, in open court, entered in the minutes; by failing to demand a jury within five days after notice of setting; by failing to deposit with the clerk or judge advance jury fees; or by failing to deposit jury fees on the second and subsequent trial days. Code of Civil Procedure Section 631(d).

In a regular civil case, the advance jury fee deposit must be made at least 25 calendar days before the date initially set for trial. In unlawful detainer cases, however, the fees must be deposited at least five days before the date set for trial. Code of Civil Procedure Section 631(b).

An eligible party can obtain a waiver of jury fees, among other costs, by submitting an application and order to the court. Government Code Sections 68630 et seq; California Rules of Court 3.50 et seq. An order waiving jury fees may not, however, relieve a party from the requirement of posting advance jury fees, to avoid waiving the right to a jury trial. Code of Civil Procedure Section 631.1.

The court may, in its discretion, grant relief from the waiver of a jury trial. Code of Civil Procedure Section 631(e). Ordinarily, a court grants relief from a waiver if the opposing party has not suffered prejudice. The mere fact that trial will be by jury is not prejudice per se. Johnson-Stovall v. Superior Court, 17 CA4th 808 (1993).

Rental agreements may provide for waiver of the right to a jury trial or arbitration. But these provisions were declared to be unenforceable by the state Supreme Court in Grafton Partners v. Superior Court, 36 C4th 944 (2003).

The most common unlawful detainer action concerns failure to pay rent. The landlord has the burden of proving by a preponderance of the evidence the following: (1) the landlord owns the property; (2) the landlord rented the property to the tenant; (3) under a written or oral rental agreement, the tenant agreed to pay rent in a specified amount; (4) the landlord properly gave three days’ written notice to pay the rent or vacate the property (or that the tenant actually received the notice at least three days before the date on which the action was filed); (5) as of the date of the three-day notice, at least the amount stated in the notice was due; (6) the tenant did not pay or attempt to pay the amount stated in the notice within three days after service or receipt of the notice; and (7) the tenant is still occupying the property. Code of Civil Procedure Sections 1161 and 1952.3(a); CACI 4302.

Failure to pay rent is not the only ground on which an unlawful detainer action may be brought. An unlawful detainer action may be brought for violating other terms of a lease or rental agreement. Code of Civil Procedure Section 1161(3). California follows the Restatement of Contracts rule that the breach must be “material,” “substantial,” or “total” to justify a termination. Whether the violation is of such a nature is a factual issue for the jury. Superior Motels Inc. v. Rinn Motor Hotels Inc., 195 CA3d 1032 (1987).

An unlawful detainer action may also be brought for “assigning or subletting or committing waste upon the demised premises, contrary to the conditions or covenants of his or her lease, or maintaining, committing, or permitting the maintenance or commission of a nuisance upon the demised premises or using the premises for an unlawful purpose….” Committing defined acts of domestic violence, sexual assault, or stalking against another tenant or subtenant on the premises creates a rebuttable presumption affecting the burden of proof that the person has committed a nuisance upon the premises. Code of Civil Procedure Section 1161(4). Local rent control laws may include certain conduct in the category of “nuisance.” See Los Angeles Rent Stabilization Ordinance Section 151.09(A)(3), including gang, weapon, and drug-related activities. An unlawful detainer action based on waste, nuisance, or using the premises for an unlawful purpose terminates the lease and allows service of a three-day notice to quit, not to cure or quit. Code of Civil Procedure Section 1161(4).

The landlord must prove that proper notice was given, and that the appropriate time period expired before the lawsuit was brought. “Giving proper notice” may be a trial issue, based on the content of the notice and the method of service. Insufficiency of the evidence on either point can be fatal to the landlord’s case.

A three-day notice to quit is used when the tenant has allegedly breached a covenant in the lease that cannot be cured. A three-day notice to perform a covenant or quit is used when the breach is capable of being cured, such as removing a pet when pets are prohibited under the rental agreement. Code of Civil Procedure Section 1161(2)-(3).

The most common notice is the three-day notice to pay rent or quit. For residential tenancies, the notice must state “the amount which is due,” as well as other payment information. If the rent due is overstated, the notice is ineffective and will not support an unlawful detainer action. Levitz Furniture Co. v. Wingtip Communications Inc., 86 CA4th 1035 (2001). Rent may be overstated if the rent was raised in violation of local rent control laws. Nourafchan v. Miner, 169 CA3d 746 (1985). Further, the notice may only be served within one year after the rent becomes due. Code of Civil Procedure Section 1161(2).

These are not mere technical requirements. The requirement that the notice not overstate “the amount which is due” is to discourage the landlord from claiming an overdue rental figure that is so exaggerated that a tenant would choose not to pay and would just leave. As the appellate court held in Levitz Furniture Co. v. Wingtip Communications Inc., under the one-year requirement is to prevent a landlord from unfairly sitting on her rights when rent is unpaid at some point in the rental relationship, and then using long-overdue rent to effect an eviction.

A 30-day notice to quit is used when the tenant is renting on a month-to-month basis, or is holding over after a longer term lease has expired. Code of Civil Procedure Section 1161(5); Civil Code Section 1946. Cause for such an eviction need not be proved, unless federal regulations or a local ordinance provides otherwise. Civil Code Section 1946.

As for service of the notice, this again is no mere technicality. Code of Civil Procedure Section 1162 provides for three methods of service: personal delivery to the tenant; substituted service – leaving a copy with an appropriate person if the tenant is not there and mailing a copy; or “affixing” a copy in a “conspicuous place on the property” if substituted service cannot be made and mailing a copy. This last method is commonly referred to as “nail and mail.”

Service of the notice is a condition precedent to maintaining an unlawful detainer action. When the fact of service is contested, the landlord may not rely on the affidavit of service; the testimony of the person who made the service is required. Liebovich v. Shahrokhkhany, 56 CA4th 511 (1997).

Certain affirmative defenses are available to the tenant in an unlawful detainer case. As with affirmative defenses generally, the defendant has the burden of proof by a preponderance of the evidence. Evidence Code Sections 115, 500.

The most common affirmative defense is breach of the warranty of habitability, which is available only in a case based on nonpayment of rent. The defendant has the burden of proving that the landlord has not maintained the property in a habitable condition during the period for which rent was not paid. The obligation to put rental units into a condition fit for the occupation of human beings, and to repair all subsequent dilapidations thereof that render it untenantable, is codified in Civil Code Section 1941. Civil Code Section 1941.1 sets out several affirmative standard characteristics, the substantial lack of which cause a residential unit to be “untenantable.” To constitute a defense, the breach of the warranty of habitability must be “substantial.” Code of Civil Procedure Section 1174.2.

If the defense is proved, a conditional judgment is entered, where possession of the premises is denied to the landlord and the tenant is adjudged to be the prevailing party, conditioned upon the payment by the tenant of the reasonable rental value of the premises in its untenantable state to the date of trial within a reasonable period of time not exceeding five days from the date of the court’s judgment or service thereof. The court may order the landlord to make repairs and correct the conditions that constitute a breach of the landlord’s obligations, order the monthly rent to be so limited until the repairs are completed, and award the tenant costs and, if awardable by statute or contract, attorney fees. The court retains jurisdiction for the purpose of ensuring compliance. If the tenant fails to timely pay all rent accrued to the date of trial, however, the court must award possession of the premises to the landlord. Code of Civil Procedure Section 1174.2.

The fact that the tenant continues to live in the premises is not a waiver of the warranty of habitability as a matter of public policy. Knight v. Hallsthammar, 29 C3d 46 (1981). However, a tenant who substantially contributes to the existence of an untenantable condition cannot claim relief for breach of the warranty. Civil Code Section 1941.2.

A somewhat related defense is the “repair and deduct” defense. This defense is available if the tenant paid for repairs himself after giving the landlord a reasonable period of time to do so. The tenant is entitled to deduct these amounts from the rent, and a notice that includes these sums would be overstated. Civil Code Section 1942.

Another affirmative defense is retaliatory eviction, which has both a common law and a statutory basis. Civil Code Section 1942.5. This defense applies when the landlord seeks eviction when the tenant has engaged in legally protected activities. The tenant must be current on rent payments.

 

Current Trends in the Fair Housing Act

Increasingly, community associations are faced with residents’ requests for both “accommodations” and “modifications” under the Fair Housing Act. Title VIII of the Civil Rights Act of 1968, a/k/a The Fair Housing Amendments Act, located at 42 U.S.C. §3601 et. seq. (1968), was enacted by Congress as a means of preventing housing discrimination based upon race, color, religion, sex and national origin. In 1988, Congress enacted the Fair Housing Amendments Act (FHAA) codified at 42 U.S.C. §3602 (1988), which expanded the scope of the Act to prevent discrimination based upon “familial status” and “handicap”.

One of the fundamental policy considerations in expanding the FHAA to include handicapped persons was to prohibit practices that restrict the choices of individuals with disabilities to live where they wish or that discourage or obstruct those choices in a community, neighborhood or development. The FHAA requires community associations, as a “housing provider”, to make reasonable accommodations to an association’s rules, policies, practices or services and allow modifications to the residential premises or common property. The single most requested “accommodation” is an exception to pet restrictions. There are other accommodation requests frequently encountered such as providing a closer assigned/handicap parking space, making exceptions to rules requiring packages to be delivered to the office or that rent be paid in person and requests for “caretakers.”

“Modification” requests involve desired changes to the interior or exterior of a dwelling and/or the common property. Some of the most prevalent modification requests include adding grab bars to a shower, installing a chair lift, installing an elevator, or installing a pool lift, to name a few.

How does a community association know when it is required to grant a requested accommodation or modification? The first step is to determine if the requesting party is handicapped as that term is defined under the FHAA and your State’s Fair Housing Act.

Definition of “handicap”

The definition of what constitutes a “handicap” is found at 42 U.S.C. 3602(h), which states, “‘[h]andicap’ means, with respect to a person-(1) a physical or mental impairment which substantially limits one or more of such person’s major life activities, (2) a record of having such impairment, or (3) being regarded as having such an impairment, but such term does not include current, illegal use of or addiction to a controlled substance …. ”

“Major life activities” include such things as seeing, hearing, walking, talking, breathing, resting, sleeping, caring for oneself, reading, learning, concentrating, and working. This is not an all-inclusive list. “Substantially limits” suggests a person is unable to perform at least one of these activities in the same manner as an average person in the general population would be able to and/or the ability to perform the activity is significantly restricted. This determination is extremely fact specific and must be evaluated on a case-by-case basis. What might be considered a disability in one case, may not be considered a disability in another.

The Code of Federal Regulations, at 24 C.F.R. 100.201, defines the term handicap and expressly provides certain conditions that are considered a handicap, and some that are not, as a matter of law.

Handicap means, with respect to a person, a physical or mental impairment which substantially limits one or more major life activities; a record of such an impairment; or being regarded as having such an impairment. This term does not include current, illegal use of or addiction to a controlled substance. For purposes of this part, an individual shall not be considered to have a handicap solely because that individual is a transvestite. As used in this definition:

(a) Physical or mental impairment includes:

(1) Any physiological disorder or condition, cosmetic disfigurement, or anatomical loss affecting one or more of the following body systems: Neurological; musculoskeletal; special sense organs; respiratory, including speech organs; cardiovascular; reproductive; digestive; genito-urinary; hemic and lymphatic; skin; and endocrine; or

(2) Any mental or psychological disorder, such as mental retardation, organic brain syndrome, emotional or mental illness, and specific learning disabilities. The term physical or mental impairment includes, but is not limited to, such diseases and conditions as orthopedic, visual, speech and hearing impairments, cerebral palsy, autism, epilepsy, muscular dystrophy, multiple sclerosis, cancer, heart disease, diabetes, Human Immunodeficiency Virus infection, mental retardation, emotional illness, drug addiction (other than addiction caused by current, illegal use of a controlled substance) and alcoholism.

In addition, over the years, the courts have found numerous medical conditions (whether physical or mental) to be a disability entitled to protection under the FHAA. See Burgess v. Alameda Housing Authority, 98 Fed. Appx. 603, 606 (9th Cir. 2004) (finding that allegations that plaintiff is “often sick” and at times “unable to do much of anything” sufficient to qualify her as disabled under the FHAA); Regional Economic Community Action Program, Inc. v. City of Middletown, 294 F.3d 35, 46-48 (2d Cir. 2002) (recovering alcoholics residing in special supportive groups are held to be “handicapped” under the FHAA); Groner v. Golden Gate Gardens Apartments, 250 F.3d 1039, 1041, 1045, (6th Cir. 2001) (holding tenant suffering from schizophrenia and depression has a “serious mental illness” and therefore, considered to be covered by the FHAA); Bryant Woods Inn, Inc. v. Howard County, Md., 124 F.3d 597, 599 (4th Cir. 1997) (holding people suffering from Alzheimer’s and other forms of dementia considered handicapped under the FHAA); Radecki v. Joura, 114 F.3d 115, 116, (8th Cir. 1997) (concluding depression can be a handicap pursuant to the FHAA); Human Resource Research and Management Group, Inc. v. County of Suffolk, 687 F. Supp. 2d 237, 252-53 (E.D. NY. 2010) (stating that individuals recovering from alcoholism, drug addiction, or other substance abuse are disabled under the FHAA); Boston Housing Authority v. Bridgewaters, 898 N.E.2d 848, 857 (2009) (determining that individual with mental impairment substantially limiting his ability to work was disabled under the FHAA); Elmowitz v. Executive Towers at Lido, LLC, 571 F. Supp. 2d 370, 376-77 (E.D. NY. 2008) (finding plaintiff that suffers from bipolar disorder, depression, and social anxiety which impaired his ability to work was sufficient to show he is disabled under the FHAA); Dr. Gertrude A. Barber Center, Inc. v. Peters Tp., 273 F. Supp. 2d 643, 651 (WD. Pa. 2003) (stating that mentally retarded individuals qualify as “handicapped” under the FHAA); ReMed Recovery Care Centers v. Township of Willistown, Chester County, Pa., 36 F. Supp. 2d 676, 683 (E.D. Pa. 1999) (holding brain-injured persons qualify as handicapped under the FHAA); US. v. Massachusetts Indus. Finance Agency, 910 F. Supp. 21, 26, (D. Mass. 1996) (concluding that emotionally disturbed adolescents may, in certain situations, qualify as handicapped under the FHAA); Cleveland v. Policy Management Systems Corp., 526 US. 795, 797, 119 S. Ct. 1597, 143 L. Ed. 2d 966, (1999) (suggesting that persons who qualify for Social Security Disability Insurance benefits would generally meet the ADA’s definition of disability); Dadian v. Village of Wilmette, 269 F.3d 831, 837-38 (7th Cir. 2001) (finding that osteoporosis that substantially limits ability to walk is a handicap for purposes of the FHAA); Shapiro v. Cadman Towers, Inc., 844 F. Supp. 116, 118, (E.D. NY 1994), order aff’d, 51F.3d328, (2d Cir. 1995) (concluding that multiple sclerosis causing intermittent limitation of motor skills and other symptoms is a handicap under the FHAA); Trovato v. City of Manchester, N.H, 992 F. Supp. 493, 495 (D.NH. 1997) (holding muscular dystrophy that substantially limits ability to walk is a handicap pursuant to the FHAA). See Housing Discrimination Law and Litigation Database, Robert G. Schwemm, Part C.; The Federal Fair Housing Act: Substantive Coverage Chapter JJD. Handicap/Disability Discrimination (June 2011).

In contrast, the courts have held the following medical conditions, at least in these particular circumstances, did not rise to the level of a handicap under the FHAA: Wells v. Willow Lake Estates, Inc., 390 Fed. Appx. 956, 958 (11th Cir. 2010) (holding that plaintiff who merely claimed he “cannot bend or move easily” did not adequately plead that he is a handicapped individual under the FHAA); Jobst v. Camelot Village Ass’n, Inc., 94 Fed. Appx. 356, 357 (7th Cir. 2004) (receiving social security benefits does not prove that plaintiff is disabled under the FHAA); Gabbard v. Linn-Benton Housing Authority, 219 F. Supp. 2d 1130, 1133- 1141 (D. Or. 2002) (rejecting plaintiffs’ disability claims based on allegations they suffered from multiple chemical sensitivity syndrome) (ADA case); Cohen v. Township of Cheltenham, Pennsylvania, 174 F. Supp. 2d 307, 324-30 (E.D. Pa. 2001) (finding testimony about problems that abused children generally have, fails to establish that the individual abused children in this case had such impairments so as to qualify as “handicapped”); De La Torres v. Bolger, 781 F.2d 1134 (Tex. CA. 1986) (explaining that under the Rehabilitation Act of 1973,” left­handedness” is not a disability).

Requests can be made Orally or in Writing

A request for a reasonable accommodation or modification can be made orally or in writing. The Joint Statement Of The Department Of Housing And Urban Development And The Department Of Justice, May 17, 2004, Reasonable Accommodations Under The Fair Housing Act Question and Answer 12, explains that:

[A] resident or an applicant for housing makes a reasonable accommodation request whenever she makes clear to the housing provider that she is requesting an exception, change, or adjustment to a rule, policy, practice, or service because of her disability…. An applicant or resident is not entitled to receive a reasonable accommodation unless she requests one. However, the Fair Housing Act does not require that a request be made in a particular manner or at a particular time. A person with a disability need not personally make the reasonable accommodation request; the request can be made by a family member or someone else who is acting on her behalf. An individual making a reasonable accommodation request does not need to mention the Act or use the words “reasonable accommodation.” However, the requester must make the request in a manner that a reasonable person would understand to be a request for an exception, change, or adjustment to a rule, policy, practice, or service because of a disability…. However, housing providers must give appropriate consideration to reasonable accommodation requests even if the requester makes the request orally or does not use the provider’s preferred forms or procedures for making such requests.

There is no requirement in the law that a formal written request be made prior to triggering a community association’s responsibility to investigate the request in a timely manner. It should be noted that a delay or failure to respond to a request can be considered a constructive denial.

Documentation Supporting the need for the Request

Associations are limited in the information they can request from a person requesting a disability or handicap related accommodation or modification. See generally Prescription Pets®, Gary A. Poliakoff, JD. and JoAnn Nesta Burnett, Esq., Common Ground, pg. 28 (Jan/Feb 2008). If the requesting party’s disability is visible, such as the need for a wheelchair, walker or cane, the association should not request any medical information concerning the disability, at least if the requested accommodation or modification is reasonably related to the obvious handicap. The Association must determine if the requested accommodation or modification will ameliorate the effects of the disability. If the requesting party is using a wheelchair and requests to install a ramp in place of the stairs leading to his unit, the nexus is also obvious and the request should be granted. If the requesting party uses a wheelchair and requests to install a visual alerting system in place of a door bell, the Association may inquire as to the nexus. Since the use of a visual alerting system does not appear to be related to the use of a wheelchair, the Association is entitled to determine how the system will ameliorate the effects of his disability requiring the use of a wheelchair. If the disability is not visible, as is the case with most mental disabilities, the Association can require documentation stating that the person suffers from a physical or mental disability, which major life activities are substantially impaired as a result, and how the requested accommodation or modification will ameliorate the effects of the disability. Id.

There are also situations in which an association may be “skeptical” of a requesting party’s need for an accommodation or modification. For example, a unit owner claims to be physically impaired and requires an elevator to get to and from her second floor unit which currently only has stairs. The person is not visibly disabled and leads an extremely active lifestyle, including playing tennis and golf, jogging five miles a day, and coordinating and attending ballroom dancing classes on the property. The requesting party provides a “physician’s statement” from a psychiatrist who shares the same last name with the requesting party, and who claims she suffers from a physically disabling condition. The association might be skeptical of the need for such an accommodation and the “physician” who wrote the statement. Based upon fairly recent case law such as Hawn v. Shoreline Towers Phase I Condo. Ass ‘n, Inc., 2009 WL 691378 (N.D. Fla. 2009) aff’d at 347 Fed. Appx. 464 (11th Cir 2009) (holding it is reasonable to require the opinion of a physician who is knowledgeable about the type of alleged disability), where an association is “skeptical” of the disability, an association, in certain cases, .may request additional medical documentation such as medical notes in order to conduct a meaningful review of the request. Lucas v. Riverside Park Condo. Unit Owners Ass’n., 776 N.W.2d 801 (N.D. 2009) (citing Hawn for the same proposition).

Notwithstanding the holding in Hawn, HUD recently filed a discrimination claim against The Philadelphian Owners’ Association (POA) concerning its process for evaluating requests for accommodation or service animals. In this new charge HUD contends that the POA required overly burdensome and invasive medical documentation before requests for accommodation would be considered. HUD also alleged that POA severely limited access to the complex’s facilities for residents accompanied by assistance animals and failed to address several instances of harassment of residents requiring assistance animals. The charge alleges that the Association’s requests for verification are improper and illegal. The charge specifically says:

Respondent POA’s pet policies discriminate against persons with disabilities in need of an assistance animal in many ways. For example, persons with disabilities who use an assistance animal may not enter the following areas when accompanied by their assistance animal: passenger elevators, lobby, lobby sitting rooms, library, art room, social rooms, swimming pool areas, fitness rooms, library, mailroom, common areas, management office or laundry room. In addition to its denials of valid reasonable accommodation requests, Respondent POA’s pet policies seek private medical information from a resident requesting an accommodation, to which it is not entitled.

It is unknown whether POA will be liable for damages, attorney’s fees and/or fines. The charge also conflicts with Hawn where a board was entitled to request verification of the requesting party’s disability and need for the accommodation; but the Hawn case did not involve claims that the association facilitated a hostile environment for persons with disabilities by failing to stop intimidation and harassment by other residents. Along the same lines, it appears the charge of discrimination against POA confers a unique duty upon the association to prevent others from intimidating and harassing the requesting party. This seems to extend a community association’s duty into areas that traditionally are, and should be, left to the individuals involved.

It is extremely important for community associations to be cognizant of the requirement that an association is required to engage in the “interactive process” which means that once a request for a reasonable accommodation or modification is received, the association must request appropriate information that will allow it to conduct a meaningful review of the request. The association must also keep the lines of communication open to obtain this information. As the Court explained in Douglas v. Kriegsfeld Corp. 884 A.2d 1109 (D.C. 2005), “[a]lthough neither statutory language in the Fair Housing Act nor its implementing regulations expressly require an “interactive process” for resolving requests for reasonable accommodations, several courts have indicated that the Act’s statutory scheme inherently imposes such a requirement.” See Jankowski Lee & Assocs. v. Cisneros, 91 F .3d 891, 895 (7th Cir. 1996) (if landlord is “skeptical of’ tenant’s alleged disability or landlord’s ability to provide accommodation, “it is incumbent upon [ ] landlord to request documentation or open a dialogue”); Jacobs v. Concord Village Condo. X Ass’n, Inc., 2004 WL 741384, at 2, (S.D. Fla. 2004); Armant v. Chat-Ro Co., L.L.C., WL 1092838, at 2 (E.D. La. Aug. 1, 2000) (quoting Jankowski Lee &

Assocs. and holding that once apprised of possible handicap, landlord has duty to inquire or investigate further); Auburn Woods I Homeowners Ass’n. v. Fair Employment & Haus. Comm’n., 18 Cal. Rptr. 3d 669, 683 (2001) (quoting Jankowski Lee & Assocs. and stating that obligation to “open a dialogue” with party requesting reasonable accommodation is part of interactive process in which each party seeks and shares information).

Generally, if the requesting party is able to establish a disability necessitating the requested accommodation or modification, the request should be granted. There are exceptions for modifications or accommodations that impose an undue financial or administrative burden upon the housing provider or fundamentally change the nature of the housing which can be considered “unreasonable.” The Joint Statement Of The Department Of Housing And Urban Development And The Department Of Justice, May 17, 2004, Reasonable Accommodations Under The Fair Housing Act Question and Answer 7.

Establishing a Prima Facie case of Discrimination

If a community association fails to grant an appropriate request for an accommodation or modification, delays in responding to such a request, denies a request based upon the person’s handicap or disability (or other protected class), the association will likely be defending a HUD complaint and/or a discrimination lawsuit. To prevail on a discrimination claim, the plaintiff must establish (1) that he or she is disabled or handicapped within the meaning of the FHA, and that the defendants knew or should have known of that fact; (2) that the defendants knew that an accommodation or modification was necessary to afford him or her equal opportunity to use and enjoy the dwelling; (3) that such an accommodation or modification is reasonable; and ( 4) that the defendant refused to make the requested accommodation or permit the requested modification. See generally Schwarz v. City of Treasure Island, 544 F.3d 1201, 1218-19 (I Ith Cir. 2008); see also United States v. California Mobile Home Park Management Co., 107 F.3d 1374, 1380 (9th Cir. 1997); Jacobs v. Concord Village Condominium X Ass’n, Inc., 2004 WL 741384, at 1-2 (S.D. Fla. 2004).

If the plaintiff establishes with sufficient evidence a prima facie case, the burden shifts to the defendant to articulate a legitimate, non-discriminatory reason for its action. United States v. Badgett, 976 F .2d 1176, 1178 (8th Cir. 1992). If the defendant satisfies its burden, the burden again shifts to the plaintiff to prove, by a preponderance of the evidence, the legitimate reasons advanced by the defendant are a mere pretext. Id.

Damages

Damages in these cases can range from nominal amounts for first time offenders to extremely large awards for intentional discriminatory conduct. The type and amount of damages available is dependent upon whether the case is filed in federal court or before an administrative law judge. Both forums provide for injunctive relief, such as ordering the housing provider to allow for the modifications or to change rules and policies, and actual damages, such as out-of-­pocket expenses, attorney’s fees and emotional distress. The difference is the monetary award. The court may award punitive damages in whatever amount is appropriate, whereas the ALJ can only award civil penalties, which are paid to the government, to vindicate the public interest. The amount of the civil penalties is limited by the law to $10,000 for a first offense, $25,000 for a second offense committed within a 5-year period, and $50,000 if two or more offenses have been committed within 7 years of the charge. The ALJ is not authorized to award punitive damages. Compensatory damages in court actions are unlimited.

Once a violation of the FHAA is established, a plaintiff is entitled to recover damages for humiliation, embarrassment, mental anguish, emotional distress, and loss of civil rights suffered as a result of the defendants’ discriminatory acts, as well as out-of-pocket expenses associated with the injury. See Memphis Community School Dist. v. Stachura, 477 US 299, 307, 106 S Ct. 2537, 91 L. Ed. 2d 249 (1986) (holding “compensatory damages may include not only out-of-­pocket loss and other monetary harms, but also such injuries as ‘impairment of reputation … , personal humiliation, and mental anguish and suffering”‘). Out-of­-pocket expenses can include costs associated with moving and storage, alternative housing, medical and counseling bills, lost wages, and transportation. A. Heifetz & T. Heinz, “Separating the Objective, the Subjective, and the Speculative: Assessing Compensatory Damages in Fair Housing Adjudications,” 26 J Marshall L. Rev. 3 (1992).

Punitive damages can be assessed in federal courts. Punitive damages are appropriate in cases of “reckless or callous disregard for the plaintiffs rights, [or] intentional violations of federal law …. ” US. v. Hurde/brink, 981 F.2d 916, (7th Cir. 1992). Punitive damages are commonplace in fair housing cases. Asbury v. Brougham, 866 F.2d 1276 (10th Cir. 1989), ($7,500 compensatory damages awarded, $50,000 punitive damages awarded in rental housing/race discrimination case); City of Chicago v. Matchmaker Real Est., supra, (punitive damages of $102,000 awarded in racial steering case). Often, these awards are not covered by insurance as intentional conduct is excluded.

Whether intentional discrimination claims are, or can be, covered by insurance is a highly debated issue. Historically, insurance coverage for intentional torts was not permitted as a matter of public policy. This general prohibition has been applied in some fair housing cases. However, there are cases holding that insurance may cover intentional civil rights violations. Regardless of how this question is resolved, it is clear that public policy does not bar insurance coverage of unintentional violations of the Fair Housing Act nor of respondeat superior liability (i.e., of a principal’s vicarious liability for its agent’s intentional discrimination).

In the case of Windmill Pointe Village Club Ass ‘n, Inc. v. State Farm General Insurance Co., 77 F.Supp 596 (M.D. Fla. 1991), the Plaintiffs alleged intentional discrimination claims against the condominium association for willfully and maliciously calculating to discriminate against plaintiffs on the basis of race and familial status by denying or making unavailable housing within their subdivisions to families with children. Further and despite Windmill Pointe Village’s knowledge that the proposed amendments would be of no lawful force, Windmill Pointe Village knowingly and willfully made and attempted to enforce an unauthorized amendment to the Declaration of Covenants and Restrictions which sought to preclude families with children from residing in the neighborhood.

In determining no insurance coverage existed under the condominium’s insurance policy, the court explained:

In addition to the fact that the insurance contract does not appear to cover liability for the intentional wrongdoing of the Plaintiffs, there is a strong public policy against permitting coverage for intentional misconduct. Northwestern National Casualty Company v. McNulty, 307 F.2d 432 (5th Cir. 1962) (public policy prohibited construction of the policy as covering liability for punitive damages); Industrial Sugars, Inc. v. Standard Accident Insurance Co., 338 F.2d 673 (7th Cir. 1964) (contract of insurance to indemnify person for damages resulting from his own intentional misconduct is void as against public policy). The Florida Supreme Court has also recognized that: ‘[i]t is axiomatic in the insurance industry that one should not be able to insure against one’s own intentional misconduct.’ Ranger Insurance Company v. Bal Harbour Club, Inc., 549 So.2d 1005, 1007 (Fla. 1989).

Further, Florida’s public policy specifically prohibits insurance coverage for intentional acts of discrimination. In Ranger the Florida Supreme Court held that “the public policy of Florida prohibits an insured from being indemnified for a loss resulting from an intentional act of religious discrimination,” based upon the state’s long-standing policy of opposing religious discrimination. Ranger, 549 So.2d at 1008, 1009.

Because both the State of Florida and the Federal government have a strong policy of opposing racial discrimination and discrimination based on age or familial status, the reasoning of the Florida Supreme Court in Ranger would also apply to cases such as the one sub Judice in which the discrimination is based upon race and familial status rather than religion.

The Court finds that the losses for which Plaintiffs seek indemnification are losses resulting from their own intentional acts of discrimination. Consequently, for the above reasons, Plaintiffs are not entitled to indemnification or defense by Defendant State Farm. Id. at 598-99.

See also Rosenberg Diamond Development Corp. v. Wausau Insurance Co., 326 F.Supp. 2d 472, 476-77 (S.D.N Y. 2004) (suggesting that coverage of a Fair Housing Act claim alleging intentional discrimination might violate New York state public policy).

While states such as Florida do not permit insurance coverage for these claims based upon public policy, other states do permit insurance coverage for intentional discrimination claims. This is evidenced by the “standard intentional act” exclusion provisions contained in most policies. Before assuming that intentional claims are not insurable claims, one must first determine the state and/or federal law applicable to the claim and the position the courts have taken. Further, even though a claim may not be a “covered claim” for purposes of payment of awards or judgments, in many cases, the insurance policies provide defense coverage for these claims, but usually under a reservation of rights.

Reasonable Accommodations – Service and Support Animals

The FHAA does not use or define the term “service animal” or “support animal”. The Americans with Disabilities Act, as Amended, (“ADA”) and the FHAA both seek to prevent discrimination and both statutes use the same or similar language. The ADA has been litigated far more extensively, and thus, the body of case law is far more expansive. Often times, statutory definitions and case law governing the ADA are used in interpreting the FHAA. While both the ADA and FHAA used to be very similar, the acts appear to be taking divergent paths, at least as applied to “service animals”. The former definition found in the CFR defining “service animals” under the ADA was “any animal that is individually trained to do work or perform tasks for the benefit of a person with a disability.” This definition, at least arguably, encompassed “emotional support animals”. The Department of Justice (“DOJ”) adopted new definitions effective March 2011, for purposes of implementing the ADA. The DOJ’s definition of a “service animal” currently is “any dog that is individually trained to do work or perform tasks for the benefit of a person with a disability…. The crime deterrent effects of an animal’s presence and the provision of emotional support, well-being, comfort, or companionship do not constitute work or tasks for the purposes of this definition.” 24 C.F.R. 36.104. Based upon the DOJ’s definition, the ADA now limits service animals to “trained” dogs, and in some cases, miniature horses, and excludes emotional support animals entirely. The effect is that in places of public accommodation, you will only find service dogs or miniature horses, unless state or local governments opt for a more expansive definition of the term “service animal”.

However, the FHAA did not follow suit and HUD expressly stated that the DOJ’s definition of “service animal” will not be applied to the FHAA. See HUD’s Memo dated February 17, 2011, from Sara K. Pratt, Deputy Assistant Secretary for Enforcement & Programs, ED to All FHEO Regional Directors and Counsel, regarding New ADA Regulations and Assistance Animals as Reasonable Accommodations Under the FHA and Section 504 of the Rehabilitation Act of 1973. HUD’s Memo states that in the FHAA context, disabled individuals may make requests for reasonable accommodations for assistance “animals” of any kind, in addition to dogs, including emotional support animals, which require no training. Herein lies the quandary, what will happen when a disabled individual has a trained monkey in his home to perform specific required motor skills, such as turning on a light switch, opening a bottle or turning a door knob — things the disabled individual can no longer do? The ADA prevents the disabled person from bringing his service monkey to a restaurant or shopping mall. A city in California addressed this issue and chose to pass an ordinance to continue to use the original definition of a service animal. See Hesperia, California Ordinance No. 2011-01; The Washington Times, Rats! Justice Department Shoos service animals, by Sue Manning, Associated Press, April 4, 2011. This ordinance allowed a woman to continue to use her two trained service rats that detect, and alert her to, severe muscle spasms. It is unlikely she will receive the same treatment outside the city of Hesperia.

The single most debated impairment is the claim that a person requires an emotional support animal to overcome a mental disability such as depression and/or anxiety. These types of impairments cannot generally be seen by the naked eye and the effects of these impairments are usually not visible either. This is a double edged sword that leads to some associations denying genuinely proper requests and also contributes to associations approving illegitimate requests to avoid potential HUD complaints and/or litigation.

As with virtually every other statutory right, there will always be people who try to take advantage of the system. All too often, a requesting party submits a “physician’s note” or “prescription” that states my patient suffers from depression and requires the presence of an emotional support animal to use and enjoy his or her dwelling. Since the note or prescription lacks the information necessary for a community association to conduct a meaningful investigation, the association’s board conducts research on the physician and his or her qualifications and determines the requesting party is the physician’s mother. The physician is a rheumatologist stating that “his patient” suffers from depression requiring an emotional support animal. The community association is skeptical of the request, not only because of the relationship between the requesting party and the physician, but also because the requesting party leads a very “active lifestyle.” When the community association board requests additional information from a treating physician who practices in the area of the alleged disability, often times, the documentation cannot or will not be produced. The requesting party may file a complaint with HUD or one of the local enforcement agencies and the community association might agree to allow the animal as part of the conciliation process to avoid the horror stories related to these types of investigations. Under these facts, the requesting party is most likely not entitled to the protections afforded under the FHAA, but the Association grants the request to avoid protracted litigation and/or fines and damages.

Compare that situation to one in which a requesting party provides a community association a letter from a psychiatrist stating that three years ago, he or she diagnosed the requesting party with disabling chronic generalized anxiety disorder and as part of the treatment he or she prescribed an emotional support animal to calm the individual and allow her to focus, sleep and breathe more easily, all of which the requesting party was unable to do. The physician has no relationship with the requesting party. The community association board sees the requesting party play tennis three times a week and determines he or she must be untruthful about the extent of the alleged disability and denies the request. The requesting party files a HUD complaint. In this case, the Association decides not to conciliate or settle and a “finding of cause” to believe discrimination has occurred is issued. In this case, the request may well have been proper.

These situations can be potential landmines for community associations. In these situations, an association should request information that will establish the mental impairment and the need for the animal as delineated in the FHAA. In those situations where the documentation does not provide the necessary information to conduct a meaningful investigation of the request or an association is truly skeptical of a request, additional information should be requested. See Hawn v. Shoreline Towers Phase I. Ass’n, Inc., 2009 WL 691378 (N.D. Fla. 2009) aff’d at 347 Fed. Appx. 464 (11th Cir 2009).

Parking Accommodations

Community associations are duty bound to avoid enforcing provisions of the declaration that have discriminatory effects and must regulate the use of the common property in a manner consistent with the FHAA. Gittleman v. Woodhaven Condo. Ass’n., Inc., 972 F.Supp. 894 (D. N.J. 1997). Gittleman requested that his condominium association provide him with an accessible parking space as a reasonable accommodation under the FHAA. The condominium association denied the request based on the condominium’s master deed, which they claimed did not grant them the authority to do so. The court found that provisions in the master deed that would compel the condominium association to violate the resident’s rights under the FHAA by refusing the request for an accommodation are unlawful and enforcement of them subjects the association to liability under the FHAA.

In Shapiro v. Cadman Towers, Inc., 51 F.3d 328 (2nd Cir. 1995), Shapiro, a tenant with a disability, requested that a parking space be made available to her immediately, rather than her being placed on the waiting list, as an accommodation for her disability. The cooperative’s Board of Directors denied the request, stating that any duty to accommodate Shapiro under the Fair Housing Act did not come into play until after she was awarded a parking space in the normal course. The Second Circuit Appellate Court held that a landlord must make all reasonable accommodations necessary to afford persons with disabilities the ability to live in their apartment meaning that landlords must take affirmative steps to alter their policies, practices and procedures so that a tenant with a disability is not denied housing opportunities. Assigning her a parking space immediately rather than forcing her to wait on a list for an undetermined amount of time is a reasonable accommodation in the policy of assigning spaces on a first come, first served basis.

Recently, in the case of Astralis Condominium Ass’n v. Secretary, U.S. Dept. of HUD, 620 F.3d 62 (Ft Cir. 2010), the Court addressed a request for reasonable accommodation to have an assigned parking space. The Court cited Puerto Rico condominium law, which provides that the transfer of common elements after the construction of a property requires the unanimous consent of the condominium owners. P.R. Laws Ann. tit. 31, § 1291i(b)(4). The association argued that without the unanimous vote of the owners, the association could not grant the request. In rejecting that argument, the court stated that the association is duty bound not to enforce a statutory provision if doing so would either cause or perpetrate unlawful discrimination, citing Gittleman v. Woodhaven Condo. Ass’n, 972 F.Supp. 894, 899 (D.NJ.1997) which enunciated a similar prohibition with regard to a discriminatory master deed provision.

In other words, to the extent that state statutes or local ordinances would undercut the FHAA’s anti-discrimination provision, the former cannot be enforced. See Trovato v. City of Manchester, NH, 992 F.Supp. 493, 498, 499 (D.N.H 1997) (finding FHAA violation and enjoining enforcement of a conflicting zoning code provision). Thus, Astralis must regulate the use of common elements in compliance with the FHAA’s anti-discrimination policies, regardless of local law.

This conclusion is buttressed by two additional considerations. First, contrary to Astralis’s importunings, the language of the FHAA itself manifests a clear congressional intent to vitiate the application of any state law that would permit discrimination based on physical handicap. See 42 US. C. § 3615 (expressly commanding that ” any law of a State … that purports to require or permit any action that would be a discriminatory housing practice under this subchapter shall to that extent be invalid”) (emphasis supplied). Second, adopting Astralis’s view would create a sinkhole that would swallow the general rule and cripple the effectiveness of the FHAA. To say that private agreements under a state’s condominium statute are capable of trumping federal anti-discrimination law verges on the ridiculous. We disavow that proposition. See, e.g., Shelley v. Kraemer, 334 US. 1, 11, 68 S.Ct. 836, 92 L.Ed. 1161 (1948) (“It is … clear that restrictions on [housing] of the sort sought to be created by the private agreements in these cases could not be squared with the requirements of the Fourteenth Amendment if imposed by state statute or local ordinance.”).

Further, in the case of Sporn v. Ocean Colony Condominium Ass’n, 173 F.Supp.2d 244 (D.NJ,2001), the Court explained that the FHAA entitles a handicapped individual to “equal opportunity” to use and enjoy a dwelling. Accordingly, “an accommodation should not ‘extend a preference to handicapped residents [relative to other residents], as opposed to affording them equal opportunity’ ” and “accommodations that go beyond affording a handicapped tenant ‘an equal opportunity to use and enjoy a dwelling’ are not required by the Act.” In this case, in response to Sporn’s requests for a handicapped parking space, the Association adopted a “Handicapped Parking Policy” in December 1999. This policy provided that “handicapped parking spaces [defined as spaces closer to the Condominium entrance] shall be provided to residents” provided that any resident seeking such a space, “trade in their deeded parking space for an Association owned space closer to the building entrance.” On its face, this policy grants the same rights to handicapped tenants as it does non-handicapped residents. In order to prevail on his discrimination claim, therefore, Mr. Sporn must demonstrate that the Association’s actions toward him individually constituted a refusal to reasonably accommodate his handicap. This he cannot do. According to his own testimony, the problems that arose between the Association and Mr. Sporn began when Sporn demanded that he be provided a handicapped space but refused to give up his non-handicapped, deeded space as required by the Handicapped Parking Policy. When asked why he needed two spaces, Sporn did not offer any explanation related to his handicap, but instead responded, “because during the summertime we couldn’t get any parking for any of our family that came down.” These comments reveal that Sporn’s request for “reasonable accommodation” was really a request for accommodation coupled with a demand for special treatment. Thus, Sporn’s refusal to accept the Association’s proposed accommodation cannot provide the basis for an FHA discrimination claim.

Another issue community associations face with regard to handicapped parking is whether the association must comply with the Americans with Disabilities Act, as Amended (“ADA”). The ADA, as well as state and local government, requires a certain number of handicapped parking spaces in places of public accommodation. In the case of Phillips v Perkiomen Crossing Homeowners Association, 12 ADD 713 (E. D. Pa. 1995), the court held that a private parking lot for residents of the community association is not a commercial facility and the association is not a private entity that qualifies as a “public accommodation” under the ADA. That is not to say that every community association is exempt by virtue of being a community association. Instead, the focus is on whether the property, or any portion, is open to the public. For example, certain hotel condominiums might be classified as public accommodations, depending on the length of the rentals and the types of services the community provides. Similarly, a community association that does not fall within the parameters of a “public accommodation” might have portions of the common property that would be considered a public accommodation. If the club house can be rented by the general public, the club house would likely be considered a public accommodation subject to the parking requirements of the ADA.

As a general rule, a community association should make parking accommodations for a requesting party that establishes a disability that requires the accommodation. With few exceptions, parking accommodation cases favor the requesting party, absent an inability to establish a disability or where a reasonable alternative is proposed.

Other Accommodations

In the case of United States v. California Mobile Home Park Management Co., 29 F.3d 1413 (9th Cir. 1994), a tenant requested that the management waive a rule that requires tenants’ guests to pay a guest fee because the tenant’s guest was a care-taker. The management company denied the request. The court found that if such a fee makes the services of a visiting home attendant unaffordable to a tenant with a disability and thus denies him/her the equal opportunity to use and enjoy the dwelling then the policy violates the FHA.

Accommodations can include a change to the term “single family residence”. In Intermountain Fair Housing Council v. Orchards at Fairview Condo. Ass ‘n, Inc., 2011 WL 162401, 11 (D. Idaho 2011) the court examined an Association’s Covenants, Conditions & Restrictions (“CC&Rs”) which expressly stated “no Unit may be used as a rooming house, group home, commercial foster home, fraternity or sorority house, or any similar type of lodging, care or treatment facility.” The court referred to 24 C.F .R. 100.SO(b )(3) which prohibits “[e]nforcing covenants or other deed, trust, or lease provisions which preclude the sale or rental of a dwelling to any person because of race, color, religion, sex, handicap, familial status, or national origin.” The court explained that HUD’s regulations on discriminatory conduct under the Fair Housing Act prohibit “enforcing covenants which preclude the sale or rental of a dwelling to any person because of   handicap.” 24 C.F.R. 100.80(b)(3) (emphasis added).

“Furthermore, the allegedly discriminatory provision in the CC & R’s is facially neutral; that is, the prohibition on group homes is not expressly related to any disability and is in fact listed among several other types of group living arrangements, including commercial foster homes, fraternity houses, sorority houses, or any similar type of lodging. Where the complained of restrictive covenant is facially neutral, the plaintiff bears the burden of showing that the covenant’s enforcement had a discriminatory effect. Martin v. Constance, 843 F.Supp. 1321, 1325-26 (E.D.Mo.1994).” Plaintiff has not alleged any facts indicating that the restrictive covenant at issue has ever been enforced.

Accordingly, enforcement of a restriction on a group home is discriminatory if the underlying reason for the prohibition is designed to preclude individuals based upon a protected class.

Reasonable Modifications Necessary to Afford Handicapped Individuals full Enjoyment of the Premises

As stated above, discrimination includes “a refusal to permit, at the expense of the person with a disability, reasonable modifications of existing premises occupied or to be occupied by such person if such modifications may be necessary to afford such person full enjoyment of the premises, except that, in the case of a rental, the landlord may where it is reasonable to do so condition permission for a modification on the renter agreeing to restore the interior of the premises to the condition that existed before the modification, reasonable wear and tear excepted.”

These requests are investigated in the same manner described above for accommodations. The same analysis for requesting supporting documentation applies equally to modifications, as well. A person must demonstrate that he/she is handicapped – suffers from a physical or mental impairment that substantially impairs one or more major life activities and the modification will allow the person to use and enjoy the premises.

Modifications may be requested in any type of dwelling; however, in a rental situation, the landlord may reasonably condition permission for the modification on the renter agreeing to restore the interior of the premises to the condition that existed before the modification, (ordinary wear and tear excepted); the renter providing a reasonable description of the proposed modifications; and the renter providing reasonable assurance that the work will be performed in a workmanlike manner with all applicable building permits being obtained. It is important to note that this condition applies only to tenants and interior modifications. There are also situations in which the interior modification will not have to be restored. If a tenant widens the doorways to provide handicapped access, the doors will not have to be restored because the modification will not affect the housing provider’s or subsequent tenant’s use or enjoyment of the premises. See 24 C.F.R. 100.203 with examples; Lincoln Realty Management Co. v. Pennsylvania Human Relations Com’n, 598 A.2d 594 (Pa. Cmwlth 1991) (finding that housing provider should have allowed tile to be removed and carpet installed; allow tenant to install washer and dryer in unit; allow tenant to install a kitchen fan and laundry room exhaust fan so long as tenant agreed to restore unit to prior condition). While this case addresses the landlord/tenant situation, an association may be faced with a request for a modification to allow an exhaust fan in a dwelling or the installation of a washer and dryer with exterior ventilation and the Association may have to permit such modifications but does not have the ability to have the dwelling the restored absent a landlord/tenant relationship.

In addition, HUD’s commentary at 42 U.S.C. § 3604(f)(3)(A) states that the person making the modifications “must seek the landlord’s approval before making modifications.” Housing providers do not have an “absolute right” to reject proposed modifications or to select or approve who will do the work, but they are entitled to secure some protection against improper modifications and faulty workmanship. Thus, according to the HUD regulations, “[a] landlord may condition permission for a modification on the renter providing a reasonable description of the proposed modification as well as reasonable assurances that the work will be done in a workmanlike manner and that any required building permits will be obtained.” 24 C.F.R. 100.203. Modifications should not be conditioned upon the requesting party agreeing to insure the modification, use of a particular person or entity to perform the work or the requesting party agreeing to indemnify the community association.

Some of the most common requests for exterior common use modifications include installing elevators, chair lifts, pool lifts, ramps, and automatic doors. These types of modifications do not have to be restored or removed at the expense of the requesting resident after the requesting resident moves, dies or is no longer disabled. However, the parties should attempt to determine if and when the modification will be removed when it is no longer necessary. Interior modifications include installing grab bars, widening doorways, lowering counters and cabinets, installing ramps, lowering door handles, and replacing carpet with tile. This list is a mere sampling of the modifications that can be requested.

Just as in Gittleman referenced above, the Association’s governing documents cannot form the basis of a denial of a request for a reasonable modification. If the Association’s documents require 75% approval to materially alter the common elements, that approval is not required to allow a disabled individual the ability to install a ramp or elevator. Further, provisions in the governing documents preventing owners from materially altering the common elements cannot prevent the installation of a pool lift.

The tenant is responsible for upkeep and maintenance of a modification that is used exclusively by her. If a modification is made to a common area that is normally maintained by the housing provider, then the housing provider is responsible for the upkeep and maintenance of the modification. If a modification is made to a common area that is not normally maintained by the housing provider, then the housing provider has no responsibility under the Fair Housing Act to maintain the modification.

 

 

 

Tax filing requirements for Condos

Condominium and other forms of community associations are entities that must account for their taxable income. Even if no tax is owed, there is still a filing requirement.

A community association will generally not qualify for tax-exempt status under Section 501(c) of the Internal Revenue Code. Nonetheless, Section 528 of the code permits a qualifying community association to make an election to receive certain tax benefits that, in effect, permits the exclusion of certain income (referred to as “exempt-function income”) from its gross income, thereby reducing (if not eliminating) its income tax liability.

If such an election is made, the community association is not taxed on its exempt-function income. However, the community association is taxed at the rate of 30 percent of the “homeowner’s association taxable income.” This rate applies to both ordinary income and capital gains.

“Homeowners association taxable income” for any taxable year is an amount equal to the excess, if any, of the gross income for the taxable year (excluding exempt-function income) over the allowed deductions. “Exempt-function income” means any amount received as membership dues, fees or other assessments from owners of condominium housing units in the case of a condominium management association or owners of real property in the case of a residential real estate management association.

Exempt-function income includes, but is not limited to, assessments made to pay the principal and interest on debts incurred for the acquisition of association property; paying real estate taxes on association property; maintaining association property; removing snow from public areas, and removing trash.

Exempt-function income does not, for example, include amounts that are not includable in the organization’s gross income other than by reason of Section 528 of the code (e.g. tax-exempt interest); amounts received from persons who are not members of the association for use of association facilities such as tennis courts, swimming pool, clubhouse; amounts received from members for special use of the association’s facilities, the use of which is not available to all members as a result of having paid the dues, fees or assessments required to be paid by all members; interest earned on amounts set aside in a reserve fund for replacement of common elements; amounts received for work done on privately owned property that is not association property; or amounts received from members in return for their transportation to and from shopping areas, or other locations.

The election to be treated as a homeowner’s association, and thus to exclude exempt-function income from gross income, is made each year by filing a properly completed Form 1120-H (U.S. Income Tax Return for Homeowners Associations). Once made, the election is binding for the particular tax year only and cannot be revoked without the consent of the Internal Revenue Service.

A community association will not always receive a tax benefit by making the election to be treated as a homeowner’s association. After computing its tax liability on Form 1120H, the community association should consider figuring the tax using Form 1120 (U.S. Corporation Income Tax Return) or Form 1120-A (U.S. Corporation Short Form Income Tax Return). For example, when the community association imposes substantial assessments for the purpose of creating reserves, it may be useful to make the election since those assessments would be non-taxable exempt income. In years when expenditures and income are more closely in balance, using Form 1120 or Form 1120-A to avoid the 30 percent tax rate on nonexempt income may reduce tax liability. Forms 1120 and 1120-A have lower tax rates that may result in less tax than figured on Form 1120-H.

Also, the type of form the community association selects to file will determine if it must make estimated tax payments. A community association that expects to file on Form 1120-H is generally not required to make estimated tax payments.

If the election to exclude exempt-function income is not made, or if the community association does not meet the requirements of a homeowners association, the community association must file tax returns in the same manner as other corporations (Form 1120 or Form 1120-A), even if it is an unincorporated association.

The laws concerning income taxation are complex. Careful tax planning, and input of an accountant is required of each community association to receive the greatest income tax benefit.

 

Insurance Deductible

Perhaps no single duty generates more angst for the average board member than the annual task of selecting the right Master Policy coverage for the community.  Unfortunately, buying the coverage is just part of the challenge, since the purchase decision is coupled with the added responsibility of making sure the association is able to qualify for coverage year after year.  That is a careful balancing act.  The Board wants to have the broadest coverage possible to protect against the large, unforeseen catastrophe, and yet not so broad that the community is in the untenable position of having had too many claims – making the project, from the carrier’s perspective, undesirable and potentially uninsurable.

The solution?  Purchase broad protection, but couple it with a higher deductible.

The reality is, condominium associations in California are beginning to show their age.  As the graph below from the Construction Industry Research Board (CIRB) indicates, a large number of apartment and condominium projects were built during an enormous multi-family housing boom, which occurred between 1983 and 1986 (see the red line below).  Condominium projects built during this condominium “golden years” are now between 23-26 years old.  Perhaps the word “golden” may be stretching it.  If the developer scrimped on quality (and many developers did), some of the interior components of those hastily constructed projects are starting to fail and fail in a most dramatic way.

Water claims in these older buildings are commonplace and, from an insurance perspective, expensive to adjust and repair.  In the average 1980-era condominium project, there are three-decade-old supply lines leading to the sink, toilet, washing machine, dishwasher, or ice maker.  These flexible lines, which have been exposed to constant water pressure day-after-day, are failing.  Since most CC&Rs place the maintenance responsibility for those supply lines on the individual unit owner, condominium boards are understandably looking for a way to shift the responsibility for the resulting damage to the individual unit owner without putting the Master Policy in peril.  A higher deductible will do just that.

It is important to be sensitive to the fact that underwriters at commercial insurance carriers are hyper-vigilant about water loss-plagued condominium projects that, over time, might eat into their employer’s profitability.  As a result, they express no hesitance to non-renew condominium projects that have experienced multiple water damage claims.  They consider the repetitive losses to be a reliable bell weather of the future.  “Two or three water damage losses is a good predictor of a much larger claim in the Association’s future,” an underwriter says.  “Let’s get off this account now, while we still can.”  Non-renewing for them has only one hurdle:   California Insurance Code requires the carrier to provide the association 60-days’ notice of their intent to cancel.

A higher deductible can help an association in three ways:

1.) A higher deductible shifts more responsibility back to the individual unit owner for claims that occurred either:

A.) as a result of the owner’s negligence; or

B.) for losses that occurred as a result of failure of the unit owner to maintain a portion of the unit that is their obligation to fix, repair or maintain per the governing documents.

2.) A higher deductible will provide the association with a modest premium savings for the short-term.

3.) A higher deductible will provide the association with a potentially significant savings over the long-term by preserving the association’s loss history and ensuring that these smaller events do not interfere with the association’s ability to purchase competitively priced coverage year after year.

Deductible Handling Procedure:

Deciding to increase your association’s deductible to $5,000 or $10,000 may be the right decision for your community, but before you make that move, be sure your Board has established a set of rules for handling the deductible.  If your association is like the average, about six out of every ten claims submitted under a property policy have occurred due to a unit owner’s negligence, or due to the failure of a unit owner to maintain their portion of the real estate.

Consider determining exactly who is going to be responsible for the deductible, and under what circumstances.  Then, be intentional about clearly communicating this change to the owners, so that they can modify their personal coverage, if necessary.  Here is an example of how some associations handle this important issue:

Responsible

Circumstances

Individual
Unit Owner

If the loss occurs as a result of the negligence of the individual unit owner.
If the loss occurs as a result of a failure of a portion of the unit that is within the unit owner’s care, custody, and control (according to the governing documents).

Condominium
Association

If the loss occurs as a result of the negligence of the Association.
If the loss occurs as a result of a failure of a portion of the project that is within the Association’s care, custody, and control.