IDR & ADR WITH YOUR CALIFORNIA HOA
OVERVIEW
Homeowners Associations (“HOAs”) are associations formed, most often as non-profit corporations, to own and manage common interest developments in California. The shareholders of an HOA (or “members,” as they’re more commonly referred to) own not only their individual homes, but a piece of the common areas located throughout their development. And like all corporations in California, an HOA is considered a separate person under the law, capable of entering into contracts, suing other persons/entities, or, as this blog is intended to discuss, being sued.
So, under what circumstances might members of an HOA wish to take their HOA to court?
HOW HOAs ARE GOVERNED
To answer that question, we first need to look at how HOAs are actually governed. To begin with, HOAs in California are largely governed by the Davis-Stirling Act, a series of statutes located in the Civil Code (although there are sections of other laws, such as those found in the Corporations Code, that also apply to HOAs). The Davis-Stirling Act lays out the ground rules regarding how HOAs may be formed, governed, and dissolved. In other words, all HOAs in California must abide by the Davis-Stirling Act, as well as other applicable California laws.
Each HOA in California is further governed by its own set of “governing documents,” the most important of which is the Covenants, Conditions, and Restrictions (“CC&Rs”). The CC&Rs describe not only the rights and obligations that each member owes to the other members of the HOA, but also the mutual rights and obligations between the members and the HOA itself (remember, the HOA is considered a person under the law). An HOA’s CC&Rs are, therefore, intended to address a wide scope of governance type issues ranging from the maintenance of the common areas and property use restrictions (e.g., setbacks, view rights, neighborhood “character,” architectural guidelines, etc.), to enforcement powers, the raising and spending of revenues (e.g., assessments), and dispute resolution. There are other governing documents (e.g., articles, bylaws, etc., rules & regulations, etc.), but it’s not necessary for purposes of this blog to go into too much detail about those documents.
Like all corporations that you’re probably familiar with, an HOA is governed by a board of directors elected by its members. And just like other corporations, the board of directors of an HOA is responsible for managing its affairs and conducting the association’s business. To accomplish the task of managing and conducting the affairs and business of an HOA, its board of directors typically enjoys many of the same powers that any corporation’s board of directors enjoys, such as:
- creating committees and appointing people to sit on those committees;
- calling and running membership meetings;
- setting elections and selecting election inspectors;
- adopting and enforcing architectural guidelines and rules;
- filing lawsuits to protect the HOA’s rights;
- defending against lawsuits filed against the HOA
- entering into contracts (with, for example, vendors, contractors, management companies, etc.);
- hiring employees (e.g., handymen, landscapers, etc.);
- hiring accountants, attorneys, architects, and other professionals to guide the board;
- levying and collecting assessments;
- maintaining, improving, and/or repairing the HOA’s common areas; and
- preparing and managing budgets.
Because an HOA’s board of directors is tasked with so many important obligations, the law also imposes on the board, as well as on each individual board member (also called a director), a heightened duty of care and loyalty, often referred to as a “fiduciary duty.” This fiduciary duty requires an HOA’s board of directors to act reasonably in carrying out the affairs of the association. An HOA’s board of directors must also treat all members of the HOAs fairly (i.e., an HOA can’t enforce certain rules against certain HOA members, but not others), without showing favoritism to certain members (e.g., to directors sitting on the board).
WHEN THINGS GO SOUTH BETWEEN YOU AND YOUR HOA
The problem is that unlike in the case of most regular corporations, for the most part, HOA boards are made up of volunteers who often have no experience running a business — especially one with millions of dollars in assets. Think about it. If a particular HOA is large (i.e., has lots of homes and common amenities), then it’s quite possible that it has extremely valuable assets. This is especially true if, for example, the HOA has amenities like swimming pools, tennis courts, club houses, parks, roads, etc.
And much more frequently than many would like to admit, homeowners find themselves dealing with board members who like to tell other homeowners what to do, or who refuse to properly manage the HOA (by failing to take care of the common areas, or by failing to make repairs to a member’s property when it is the HOA’s responsibility to do so). Sometimes boards of directors refuse to enforce the governing documents, for example by allowing one member to negatively impact the rights of another member, while other boards of directors might act arbitrarily, dishonestly, or capriciously. Often, such conduct is engineered by one or two directors who exert more influence on the board as a whole than they should. In short, sometimes board members are dishonest, sometimes they are power hungry jerks who like to flaunt their authority, and sometimes they become directors solely to benefit themselves at the expense of the other members, viewing their HOAs as their personal fiefdoms.
In all cases where one or more directors on an HOA’s board are violating their obligations under the CC&Rs, members of that HOA may sue the HOA as a whole, or in some cases, even individual board members, to compel the HOA’s compliance, and even to remove a bad director.
INTERNAL DISPUTE RESOLUTION & ALTERNATIVE DISPUTE RESOLUTION
IDR
With some exceptions, members cannot just decide to sue their HOAs without first trying to resolve things informally. The two most common types of dispute resolution in the context of homeowner/HOA disputes are internal dispute resolution (“IDR”) and alternative dispute resolution (“ADR”).
Under Civil Code section 5915, an HOA must participate in IDR if a homeowner requests it. The reverse is not true. But that hasn’t stopped some HOAs from claiming otherwise—either by misreading the statute or pointing to governing documents that require both parties to engage in IDR. To the extent that your HOA’s governing documents require you to engage in IDR, those provisions are unenforceable because they directly conflict with the Davis-Stirling Act.
IDR, is an informal “meet and confer” process available to members and HOAs to try to work out disputes without the need for escalation. Under Civil Code section 5905, an association may use a simple procedure that amounts to a prompt sit-down with one or more directors to discuss the dispute. There is no judge, no mediator, and no neutral third party unless both sides agree to bring one in, which is uncommon. The HOA cannot charge any fees or costs for IDR. Each side may bring an attorney at its own expense, but most IDRs take place without counsel present. If one side does bring an attorney, the other is entitled to do the same. IDR as a requirement is a one-way right, meaning that while an HOA must provide a homeowner with the right to engage in IDR, the homeowner is not required to do so if the HOA requests it.
Typically, however, by the time a member of an HOA is ready to sue, the member in question has already spent a good deal of time trying to address the matter internally, so a lot of homeowners decline to proceed with IDR. For example, assume that an HOA and a homeowner are embroiled in a dispute because the HOA has demanded that the homeowner take down a shed erected in the owner’s backyard. A homeowner might try to point out that many of his/her neighbors have similar sheds and the HOA is not requiring them to take their sheds down. Such a homeowner might appeal to the HOA’s management company, and/or write emails to the board, and/or even speak up at board meetings. In such a case, the owner may decide that he/she has already attempted to address the dispute informally, i.e., that he/she has already engaged in IDR, and thus skip out on sending a formal request to the HOA’s board of directors for further IDR.
ADR
Before going further, and because terminology matters, it’s important to be precise about what “ADR” means in the context of HOA disputes. Technically, ADR includes both mediation and arbitration. And while a lot of laypeople, and even some sloppy attorneys, use “arbitration” and “mediation” interchangeably, they are fundamentally different processes with entirely different outcomes.
Mediation is just a fancy word for settlement discussions. It is not binding. There are no witnesses testifying, no rules of evidence to follow, no depositions being conducted, and no judges or juries making any findings/decisions. It is simply formal settlement discussions being conducted in front of a neutral person, typically a retired judge or experienced attorney. Each side participating in mediation pays half of the mediator’s fees, and if they have their own attorneys, they each pay for their own attorneys as well.
While mediation is, as I said above, a fancy word for settlement discussions, arbitration is essentially a private trial process agreed to by parties to a contract. It is synonymous with suing someone in court. With arbitration, the judge and jury roles are taken by an arbitrator who will ultimately rule on the matter by issuing his or her decision. Although some contracts required arbitration state that the arbitration is non-binding—in which case if party isn’t happy with the arbitrator’s decision, that party can reject it, at which point the entire case will move to the regular court system—most arbitrations are binding. That means that the arbitrator’s decision is final, and there is virtually no rights to appeal. That decision can then be filed with the superior court, at which time it becomes a judgment—the same judgment that one would get after going to trial in court.
The Davis-Stirling Act requires ADR (i.e., mediation) prior to filing a lawsuit that is: (1) intended to enforce the governing documents; and (2) only declaratory, injunctive, or writ relief, or seeks those remedies along with money damages of $12,500 or less. In all other instances, the Davis-Stirling Act does not require mediation or any other form of ADR.
Even when mediation isn’t legally required, however, my law firm almost always recommends it. There are two good reasons why we do that. First, we can often negotiate remedies that a court could never order, even if you win at trial. For example, we have successfully negotiated the removal of abusive or disruptive directors, sometimes permanently and sometimes for a set period of time, as part of resolving a dispute via a settlement agreement negotiated during the pre-litigation ADR process. This is not a remedy a judge or jury could grant in a typical enforcement lawsuit unless there is an explicit statutory basis for that person’s inability to serve. Courts generally don’t interfere with an HOA’s “democratic process.” But in settlement, the parties can agree to anything that’s lawful and mutually acceptable.
Second, mediation is orders of magnitude less expensive than litigation, and because we use certain systems that I developed when I pioneered this niche area of the law, my firm’s settlement rate at the pre-litigation stage is well over 50%.
At the very least, ADR accomplishes three things: (1) it tells the HOA that a homeowner is serious about whatever dispute is at issue; (2) it provides an opportunity for the homeowner and the board to have one on one time to hash out the dispute before having to decide on whether to spend a lot of money on a lawsuit; and (3) both sides get to hear the opinions of an experienced, knowledgeable, and impartial mediator regarding the dispute. With respect to the latter, that’s often enough to convince a stubborn board to do what the HOA is required to do.
And in such cases, an experienced attorney will also demand that the HOA cover a homeowner’s attorneys’ fees. While the HOA is not obligated to agree to repay a member’s attorneys’ fees as part of the ADR process, attorneys representing HOAs know that if the case does not settle at ADR, and a lawsuit becomes necessary, if the homeowner prevails against the HOA in court, the Davis-Stirling Act (as well as most CC&Rs), empowers the court to award the homeowner his/her attorneys’ fees and costs.
Because ADR can so often resolve a dispute between a homeowner and the HOA (even a serious dispute) taking advantage of the ADR process, even when not technically required, often proves much more beneficial to the homeowner than to the HOA.
FILING A LAWSUIT AND YOUR ATTORNEYS’ FEES AND COSTS
Sometimes, however, no matter how hard homeowners try to resolve things with their HOAs, a lawsuit is necessary. If the parties attempted ADR but failed to reach a settlement, or if the HOA rejected or ignored a member’s request to engage in ADR in the first place, the homeowner interested in filing a lawsuit can proceed in court, or in the case where the CC&Rs require binding arbitration, proceed with filing a demand for arbitration. And again, upon prevailing, the Davis-Stirling Act entitles the homeowner to reimbursement of his/her attorneys’ fees and costs.
CONCLUDING THOUGHTS
The Davis-Stirling Act does provide a clear path for a homeowner that wishes to take their HOA to court.