Management companies, for the most part, have become more sophisticated over the last several years. This is as a result of education and training that many management companies are requiring of their managers, which benefits both the management company and the associations which they manage. The realization of the need for training and education is also a product of the fear of potential liability by management companies arising from their acts and/or their omissions. Although most management contracts include provisions requiring the association to indemnify, defend and hold harmless the management company from third party claims against them arising from their acts/omissions as a manager, the risk of liability and exposure of a management company still remains high. This is especially true when the manager/management company fails to perform their functions as outlined within their contract; fail to carry out their duties as required; or perform services and/or provide advice that is far outside their area of expertise.
The following are examples, though not exhaustive, of circumstances that we have seen all too often that can expose a management company to potential liability.
REVIEW AND UNDERSTANDING OF GOVERNING DOCUMENTS
Managers often fail to review and understand the association’s governing documents. Managers often wrongly assume that all governing documents (Covenants, Conditions and Restrictions; Bylaws and Rules and Regulations) for condominium projects or planned unit developments are basically the same. As such, the manager may believe that what the governing documents state about one condominium project are generally the same for other condominium projects. Though there are basic elements that show up in virtually all sets of governing documents, every association’s governing documents must be reviewed carefully by the manager when they take over the account to ensure that the manner in which the association is operating in compliance with the governing documents.
An important example of this review process includes understanding responsibility for maintenance, repair and replacement of common area, exclusive use common area and the units. This requires an understanding of the definition of these elements which, in a condominium project, would also include reviewing the condominium plan, as well as determining whether or not certain responsibilities have been assigned in a way that are not prototypical. Because many documents do not clearly define what constitutes an element of a unit or the common area, it may be necessary to seek input from legal counsel. Difficult examples include understanding what party, owner or association, is responsible for patios, balconies, and roof decks.
Another critical provision which managers must understand is the basis on which assessments are to be levied for each association that they manage. Managers should not assume that all associations assess equally. Also, managers should not automatically assume that the historic method of calculating assessments is in fact compliant with the association’s CC&Rs. In other words, just because the prior manager did it a particular way does not mean that way is correct. Again, review the documents to ensure that the proper method is being utilized. Generally, assessments can be either uniform, i.e., equal amongst all of the units or variable, i.e., all or part of the assessments are based upon square footage of the unit or lot.
Managers should routinely be proactive in advising and recommending to the Board that they properly maintain and repair those elements in which they are so charged pursuant to the association’s governing documents. Often times, Board of Directors will defer maintenance so as to maintain lower assessments. Though this may make the members happy in the short term, in the long run the deferred maintenance will catch up to the association and its members in the form of significant damage to the common area and the separate interests which results in special assessments and liability for property damage.
This may entail recommending (and documenting the recommendation in writing) that the Board raise the regular assessments which, pursuant to Civil Code Section 1366, can be raised up to 20% unilaterally by the Board and/or having a special assessment of up to 5% of the association’s annual gross budget. In those instances of long term deferred maintenance, the Board’s unilateral right to raise the regular assessments 20% and/or a special assessment of 5% may be insufficient to meet the needs of the association. In such cases, the board may need to go to the membership to seek a special assessment which requires a majority of a quorum of the members voting in favor of such a special assessment. In limited circumstances, the Board may also be empowered to impose an emergency assessment under Civil Code Section 1366(B). In such an event, it is important for management to assist the Board in evaluating the situation and determining whether an emergency assessment is appropriate. This may also entail a recommendation to seek a legal opinion concerning the applicability of an emergency assessment.
While the management company cannot force the Board to raise assessments, or invoke a special assessment, it is management’s obligation to provide the necessary information to the Board so that the Board can evaluate the overall physical condition of the common area structures; evaluate the reserve study and the funding recommendation set forth therein; as well as understand the overall integrity of the buildings and the costs associated with such maintenance and repair. Moreover, management’s proactivity in providing and documenting information and recommendations can provide a significant level of protection against claims if the Board refuses to follow advise or act on information supplied.
DISCLOSURES DURING THE SALES PROCESS
Management companies can also create liability for themselves by failing to provide proper disclosures during the pendency of a sale of a unit. Management companies are increasingly outsourcing their disclosures to online companies as a way to limit potential liability. However, these outsourcing companies require that management companies update their online disclosures whenever there is a significant change in the association. This would include such areas as increased assessments, passage of a special assessment, litigation involving the association, and other matters which would be material to a buyer making a decision to purchase.
Unfortunately, many management companies have fallen prey to reliance upon computerized calendaring systems that simply requires the manager to review the disclosures for the association on a monthly basis. This works as long as there are no significant changes that need to be disclosed within that thirty (30) day period. However, as often is the case, changes occur mid-month. If a sale closes based upon an outdated disclosure, this can in fact create liability for the association and the management company. As such, managers should not simply rely on a calendaring system, but, rather, each manager should be checking the currency of disclosures each time it outsources the disclosures for a potential sale, not just on a monthly basis.
KNOWING ONE’S LIMITATIONS
As we know, Boards often look to the Association’s manager to carry out numerous roles, some of which may beyond the professional capacity, training or expertise of a manager. This may include asking management to act as the association’s attorney, accountant, or construction manager. Though managers are often reluctant to do so, they absolutely need to advise a Board of when they are being requested to perform a function that is outside or beyond their expertise or contractual scope. A Board of Directors that demands manager’s provide services beyond their qualifications is a Board that will certainly blame the manager if something goes wrong. If a manager fails to advise the Board of such limitations on services, and the manager attempts to perform functions that they are not qualified to perform, and certainly not insured for, the management company obviously opens itself up to potential claims of liability which may or may not be defended by insurance.
Examples of management companies going beyond their field of expertise can be found in many areas. Typical examples include the Board asking the manager to render legal advice with respect to interpretation of the Association’s governing documents, drafting a contract, interpreting a contractor’s contract, advising on potential litigation issues, etc. In cases where an interpretation of legal documents is being requested or, where the association is prepared to enter into a contract, especially one that may be significant with respect to amounts or, which, if the contract is breached could lead to damage to the association and/or its members, the manager should recommend the Board seek the advice of its legal counsel. Again, the manager is not licensed to practice law nor are they insured to carry out such functions.
PROCESSING OWNER REQUESTS
Managers are frequently asked to approve a member’s architectural request. Clearly, a manager should never unilaterally approve an architectural request whether orally or in writing. In fact, even when handling or facilitating an application, management should make it clear to applicants that management has no decision making power. Applicants hear what they want to hear and consequently, written responses or receipts should be a consistent practice in handling architectural applications. If approval is provided by a manager, and is relied upon by an owner in carrying out improvements to their property, the Board will have a difficult time unwinding that “approval” since, a member can generally rely on statements or writings presented by the manager as the agent of the Association.
When a manager receives an architectural application, it should be immediately date stamped as to when it was received so as to ensure that a response is provided timely and in compliance with the Association’s governing documents. This is another aspect of the governing documents which managers should familiarize themselves with to protect the Association from missing deadlines which could result in an inadvertent approval. Applications should be promptly provided to the Board and/or the Architectural Review Committee, depending upon who has the review and approval responsibility pursuant to the Association’s governing documents. Managers should remind the Board/ARC of the time frames in which to respond and calendar a response accordingly so as to prevent the risk of having the architectural request deemed automatically approved for failing to provide a timely response. Establishing a written protocol for the handling of architectural applications which is provided to the members is a great way to avoid being accused of mishandling an application.
Another issue that causes issues for managers is how they respond to a member’s request for records. Often, the member requesting the records is one who is seen as a “trouble maker” or “gadfly”. As such, the manager and Board, may already have their blood pressure up when they see a request from a particular owner. Notwithstanding this normal physiological response, providing records is a statutory obligation of the Association which is often times carried out by the manager. There are very strict time frames in which the association must comply with a request for access to inspect records, minutes, financial documentation, membership list, etc. Managers should be keenly aware of what and how access is to be provided and the time frames in which to respond. A common misconception by Owners and Managers alike is the Association must provide copies of Association records rather than simply making them available for inspection and copying by the requesting owner. Association’s and their managers are not legally obligated to provide copies of requested documents. Managers should also understand that the documentation for which access is to be provided is quite broad as set forth in Civil Code Section 1365.2. Even in those circumstances where a member is seeking a membership list based upon a stated purpose of recalling the Board of Directors which, is typically not in the best interest of the Board or the manager, that request is nonetheless legitimate and must be properly and timely complied with.
PERCEIVED CONFLICTS OF INTEREST
A touchy situation for Management companies is when they have an ownership or financial interest in a construction company. Such related entities may be for basic construction, landscaping, tree services or other maintenance/repair affiliated areas. There is of course nothing wrong with a management company owning or having a financial interest in such entities or having them perform services for the association’s management clients as long as there is a full and complete disclosure by the management company to the association of that ownership or financial interest. Management companies have obligations to disclose their interest in affiliated companies and the management company must allow the Board to make good faith decisions in selecting contractors including obtaining competitive bids from other entities.
CONCLUSION
The above is not by any means a full recitation of all of the areas in which management companies can create liability for themselves or create opportunities for liability. Rather, this article is designed to foster internal reviews as to how management companies function and conduct business so as to attempt to avoid these and other areas of liability. Again, management companies are well served by performing the services as outlined within their management contract and not straying from their stated duties and obligations. Knowing what you know and knowing what you don’t know, thus allowing you to ask the right question in performing your services, will help tremendously in avoiding liability.
