California homeowners associations are afforded broad discretion in the management of common interest developments. In the California Supreme Court's 1994 decision Narstedt v. Lakeside Village Condo. Assn., the Court stated "[g]enerally, courts will uphold decisions made by the governing board of an owners association so long as they represent good faith efforts to further the purposes of the common interest development, are consistent with the development's governing documents, and comply with public policy."
In 1999, the California Supreme Court in Lamden v. La Jolla Shores Clubdominium Homeowner's Assn., adopted a modified version of the corporate business judgment rule for community associations. In Lamden, a condominium owner sued the owners association for diminution in the value of her property after the association decided to spot-treat termite infestation in her unit (rather than fumigate). The Court held:
[w]here a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant statutes, covenants and restrictions to select among means for discharging an obligation to maintain and repair a development's common areas, courts should defer to the board's authority and presumed expertise. Thus, we adopt today for California courts a rule of judicial deference to community association board decision-making that applies, regardless of an association's corporate status, when owners in common interest developments seek to litigate ordinary maintenance decisions entrusted to the discretion of their associations' boards of directors." But what rule should the Courts apply to non-maintenance-related decisions?
That question has been answered, at least in the Fourth District Court of Appeal (San Diego and Imperial Counties) by the recent decision in Haley v. Casa Del Rey Homeowners Association (2007). In Haley, an owner in a condominium development sued the homeowners association for unlawfully amending the CC&Rs and for failing to enforce the development's restrictions equitably. The owner complained to the association that many lower unit owners had improperly extended their patios to encroach into common areas. Upon investigation, the association determined that the CC&Rs had been violated by the encroachment.
As a result, the association proposed an amendment to the CC&Rs which gave discretion to the association to allow patio extensions under certain defined circumstances. According to the governing documents, the proposed amendment could be approved by a 60% majority vote. The amendment was adopted by the majority and the association commenced the task of deciding which patio extensions would be permitted to remain and which would require removal. All but a small number of owners complied with the association's subsequent decisions under the new amendment.
After trial, both the jury and the court agreed that the plaintiff had failed to prove any wrongdoing by the association. The amendment to the CC&Rs was lawfully passed and the association had not abused its discretion in its enforcement of the new amendment. On review, the Court of Appeals affirmed the trial court rulings.
Relying upon and extending the Nahrstedt and Lamden rule of judicial deference beyond ordinary maintenance issues, the Haley court stated that "Lamden is not directly on point as this case does not concern ordinary maintenance decisions. However, we believe it also reasonably stands for the proposition that the association had discretion to select among means for remedying violations of the CC&Rs without resorting to expensive and time-consuming litigation, and the courts should defer to that discretion."
What Does This Mean For California Homeowners Association Managers?
All California homeowners associations should recognize that the courts will be inclined to defer to the Board's discretion so long as decisions:
- represent good faith efforts to further the purposes of the common interest development;
- are consistent with the development's governing documents; and
- comply with public policy.
Further, all Board decisions should be made:
- upon reasonable investigation;
- in good faith; and
- not in an arbitrary and capricious manner
While homeowners associations may have gained some additional freedoms under the Haley court's decision, the authority and discretion of associations are not unlimited. What is considered fair and reasonable by one trier of fact may be found arbitrary and capricious by another. The determination of what is and what is not properly within the homeowner's association's discretion is a fact intensive analysis to be determined on a case by case basis.
If you have any questions regarding any real estate legal matter, in San Diego please contact Brian Frasch (litigation) at bfrasch@gordonrees.com or Eric Young (transactions) at eyoung@gordonrees.com or call us at (619) 696-6700. In San Francisco, please contact Phil Wang at pwang@gordonrees.com or call us at (415) 986-5900. This Real Estate Update was prepared by Jason Dawson of the firm's San Diego Office. He can be reached at jdawson@gordonrees.com.
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