LHC Newsletter Vol. 17, No. 2
2025 Year-End Review of California Legislation and Cases which affect Homeowners’ Associations and Common Interest Developments
By: David A. Loewenthal, Esq.
Michael E. Zárate, Esq.
PUBLISHED CASES:
11640 Woodbridge Condominium Homeowners Association v. Farmers Insurance Exchange (3/28/2025) 110 Cal.App.5th 211
Significance: Clarifies how California interprets all-risk, or open-peril, coverage for condominium associations. This analysis is especially relevant for associations starting large-scale repair projects and may influence how associations and insurers negotiate insurance coverage terms. The decision also reveals potential exposure for insurers under bad-faith and punitive-damage theories.
Facts: 11640 Woodbridge Condominium Homeowners Association (Association) incurred more than $3.5 million dollars of water damage during a reroofing project when a pair of rainstorms penetrated a partially constructed roof and caused extensive interior damage. Farmers Insurance Exchange (Farmers) denied coverage arguing that: (1) the temporary tarp was not a “roof”; and (2) the roofer did not meet the standard of care during the roofing process. In addition, Farmers noted that the policy contained exclusions for: (1) Water Damage; and (2) Faulty Workmanship and applied those exclusions as a part of its denial.
Disposition: The Appellate Court held that insurance coverage can remain intact during repairs, even when structural components are dismantled. It relied on the policy’s definition of “covered property,” which expressly included “repairs and alterations.” Although Farmers attempted to deny coverage under broad exclusions in an “all-risk” policy, specifically the “water damage” and “faulty workmanship” exclusions, the Appellate Court emphasized that such exclusions must be interpreted narrowly to protect the reasonable expectations of policyholders. Farmer’s had argued that the loss was caused entirely by the contractor’s negligence, but the Appellate Court found that it had not shown the damage would have been avoided if the contractor adhered to industry standards. Farmer’s questionable interpretation of its own policy not only failed to defeat coverage but also exposed it to potential bad-faith and punitive damages. The decision reinforces that insurers must treat their insureds’ interests with equal consideration and conduct thorough good-faith investigations of all claims. Ultimately, the Appellate Court reversed the trial court’s granting of summary judgment in favor of Farmers and awarded the Association its appellate costs.
Ridley v. Rancho Palma Grande Homeowners Association, (August 28, 2025) 114 Cal.App.5th 788
Significance: The business judgment rule and the rule of judicial deference to condominium associations do not apply when an association abandons its duties by failing to conduct a reasonable investigation and acting in bad faith regarding the maintenance and repair of common areas.
Facts: Around April 2018, the crawlspace beneath the condominium owned by Doug Ridley and Sherry Shen (Homeowners) unit flooded. Because the crawlspace was a common area under the control of the Rancho Palma Grade Homeowners Association (HOA), the responsibility for investigating and remedying the water intrusion rested with the HOA, not the Homeowners. Early in its investigation, a plumber hired by the HOA learned from the City of Santa Clara (City) that the water was likely coming from an abandoned but undestroyed well. Three drilling contractors subsequently engaged by the HOA echoed that same conclusion.
Despite this consistent input, the HOA rejected the well theory and decided that no well existed. Instead, it adopted the position that the flooding was caused by a high groundwater table. The HOA maintained this position even as additional evidence undermined it, including: (1) another flooding event in March 2019; (2) the lack of water in trenches dug near the unit by one of the contractors; and (3) the discovery of a sinkhole in September 2019.
Exacerbating the problem, the HOA attempted to influence the opinions of hydrologists it consulted by withholding information about the potential well, and it misrepresented the expert opinions it had received from the City, the Water District, its membership, and the courts. As a result, the HOA took more than 19 months to remove the water and begin meaningful repairs. During this delay, the Homeowners’ unit suffered significant damage.
Disposition: The Appellate Court affirmed that the trial court had ample grounds to conclude that the HOA violated its subsidiary duties to maintain and repair the common areas. Specifically, the HOA (1) failed to conduct a reasonable investigation into the source of the problems and (2) failed to remediate the Homeowners’ unit within a reasonable time.
The HOA acted in bad faith by refusing to search for the well and by declining to remediate the Homeowners’ unit. The trial court correctly declined to apply both the business judgment rule and the rule of judicial deference ordinarily afforded to condominium associations on matters of maintenance and repair because of this bad-faith conduct.
In addition, the HOA could not rely on the exculpatory clause in its CC&Rs. The clause was inapplicable because the HOA’s conduct amounted to gross negligence, with ample evidence of an extreme departure from the ordinary standard of care. The Appellate Court affirmed the trial court’s injunction and stated the respondents could recover costs on appeal.
Casa Mira Homeowners Association v. California Coastal Commission, (12/12/24) 107 Cal.App.5th 370
Significance: The California Coastal Commission (Commission) interprets “existing structures” to mean those structures that were in place before the California Coastal Act of 1976 took effect on January 1, 1977. Under this interpretation, structures built before that effective date can be protected through construction that alters the natural shoreline, such as seawalls, when necessary “to serve coastal-dependent uses or to protect existing structures…in danger from erosion.” In contrast, structures erected after January 1, 1977 do not qualify as “existing structures” under the Act and are not eligible for shoreline-altering development.
Facts: In 2018, the Casa Mira Homeowners Association sought a coastal development permit to construct a 257-foot seawall to protect three assets: (1) a condominium complex and sewer line constructed in 1982; (2) an apartment building dating to 1972; and (3) a portion of the Coastal Trail. The California Coastal Commission approved only a 50-foot seawall to protect the 1972 apartment building, concluding the condominium complex and sewer line were not entitled to shoreline-altering protection and that the Coastal Trail could be relocated inland. On appeal, the court confronted the central question: must an “existing structure” exist at the time the Coastal Act was enacted, or at the time the statute is applied? Although the court recognized that the statutory text alone did not definitively resolve this issue, it examined the Coastal Act as a whole and held that “existing structure” refers exclusively to structures standing before the Coastal Act’s January 1, 1977 effective date.
Disposition: The Appellate Court reversed the lower court’s interpretation of “existing structures,” replacing it with its own determination. The term refers only to structures predating the Coastal Act’s January 1, 1977 effective date.
Further, the Commission lacked substantial evidence to support its finding that shoreline armoring was unnecessary to protect the existing Coastal Trail. The Coastal Trail constitutes a coastal-dependent use entitled to protection, emphasizing that no viable inland relocation alternative existed that would preserve the trail’s essential aesthetic and recreational value along the ocean and beach.
Majestic Asset Management, LLC v. The Colony at California Oaks Homeowners Association, (12/16/24) 107 Cal.App.5th 413
Significance: If a performance deed of trust is subject to foreclosure, the court will typically determine the value under standard contract principles, not tort principles. Further, if the deed of trust requires future acts or ongoing performance, those obligations may survive foreclosure and continue to bind the parties.
Facts: Majestic Asset Management, LLC (Majestic) purchased a golf course connected to a gated community in Murrieta, California. When Majestic purchased the golf course, it assumed an obligation to maintain the golf course in good condition under a performance deed of trust (PDOT) in favor of The Colony at California Oaks Homeowners Association (HOA) community. Majestic failed to keep up with its obligations leading to browning grass, dying trees and a dried up lake. Majestic and the HOA engaged in two rounds of litigation that ended in a court-ordered foreclosure sale based on Majestic’s failure to perform its duties under the PDOT. The trial court valued the PDOT at $2,748,434.37, and held that the maintenance obligations would survive the foreclosure.
Majestic argued on appeal that the trial court erred by valuing the PDOT using the “cost of repair” measure, a remedy from tort law, even though the foreclosure was based on a breach of contractual obligations under the PDOT. The Appellate Court agreed that the trial court had applied the wrong legal framework; however, it had reached the correct outcome because “the value for purposes of the foreclosure sale is limited to the value of the performance obligations to which the Association had a right under the PDOT and which appellants failed to perform.”
Applying the proper contract measure to the PDOT still produced an amount of $2,503,500. This figure is lower than the amount awarded at trial due to an additional deduction representing 36 months of management fees.
Disposition: The Appellate Court largely affirmed the trial court’s ruling but did so on contract principles rather than tort law. It reduced the judgment by $244,934.37, the present-value discount for 36 months of management fees, resulting in a total award of $2,503,500. The Appellate Court affirmed that the trial court had the authority to issue additional equitable orders to ensure the PDOT’s maintenance obligations continued after foreclosure. This prevented Majestic from exploiting its own nonperformance by paying only for partial completion under the PDOT and then using foreclosure to escape the remaining contractual duties.
UNPUBLISHED CASES
Lipton v. Fairbanks Ranch Association (1/21/2025) 2025 WL 258828
Significance: A homeowners association (HOA) has discretion in how it enforces the restrictions in its CC&Rs but cannot fail to enforce them. An HOA that fails to enforce its governing documents within a reasonable time is not entitled to judicial deference.
Facts: In 2017, the Lotsoffs discovered that the retaining wall surrounding their tennis court was failing and required repair. Completing the repair required removing a mature bamboo hedge that had provided the neighboring Liptons with a natural visual barrier from the tennis court and its lights. After the hedge was removed, the Liptons reported to the Fairbanks Ranch Association (Association) that the now unscreened court violated the community’s CC&R’s. Despite this complaint, the Association declined to require the Lotsoffs to restore comparable natural screening. Instead, it permitted the Lotsoffs to: (1) plant a different bamboo species that was slower-growing and did not reach the height of the original hedge; (2) install a thirty-minute timer on the tennis court lights; and (3) add tennis court screening. The Liptons objected, asserting that the Association’s governing documents expressly require that “Tennis courts must be located so that they will not infringe upon view corridors. Courts should be naturally screened from adjacent homesites and wind screens should be kept to moderate heights.”
Disposition: The Association failed to enforce its own CC&Rs by not requiring adequate natural screening between the Lotsoffs’ tennis court and the Liptons’ property within a reasonable time. Since the Association neglected to enforce its governing documents, the Association was not entitled to judicial deference for its decisions.
Disclaimer
This newsletter is provided for informational purposes only and does not constitute legal advice. The information contained here is general in nature and may not reflect current legal developments or apply to your specific circumstances. Receipt of this newsletter does not create an attorney-client relationship.
The firm is licensed to practice law in the State of California. This newsletter is not intended to provide legal advice regarding any jurisdiction outside of California. Readers should not act upon the information contained in this newsletter without seeking professional legal advice based on their particular facts and circumstances.
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