Reader Questions – Management Cutbacks

Dear Mr. Richardson: I received notice from my association that our management company resigned and that the association intends to self-manage.  I am uncomfortable about the expertise that exists on the board to properly run the business of the complex.  What does the Department of Corporations require? T.Z., Huntington Beach

Dear T.Z.:

Neither the California Corporations Code nor the Davis-Stirling Act requires that HOAs have professional management. However, the law has become so complex that it is hard to imagine operating an association without the help of an experienced professional manager. For example, who will prepare the monthly financial reports (Civil Code Section 5500), the Annual Budget Reports and Annual Policy Statements (Civil Code Sections 5300 and 5310), the disclosures to prospective purchasers (Civil Code Section 4530), or the required annual reserve disclosures (Civil Code Section 5570)? 

In my experience, associations without professional management generally operate far outside the Davis-Stirling Act, and that directors acting as volunteer managers, however well-intentioned, have little idea of what this very complex body of laws requires of HOAs.

Best regards, Kelly

Hello Kelly: My HOA board has hired a new management company that will only be responsible for collecting fees.  We have over 100 units so it is not “mom and pop.” The board does not want to hire a construction manager to oversee defect repairs from a lawsuit that settled.  It concerns me that this board is assuming responsibility for things they have no expertise in. Thanks, L.F., Carmel Valley

Dear L.F.:

Many smaller HOAs hire management companies on a “financial only” basis to prepare the monthly, quarterly, and annual reports, to pay bills, prepare budgets, and collect assessments. This means the volunteer board must handle maintenance and repair issues on the property. This arrangement is often pursued because management companies are normally able to charge significantly less for the “financial only” services.

However, the Business Judgment Rule (found in most governing documents and in Corporations Code Sections 7231 and 7231.5) requires that the appropriate expertise be brought forward to preserve volunteer immunity. Boards should hire the appropriate expertise needed, including construction expertise when a significant project is underway. Directors often feel they have sufficient expertise to manage a project, but do they truly qualify as experts and do they understand they are not acting as directors when they act as construction managers?

Best regards, Kelly

Kelly: Is it illegal for our board president to receive pay for handling vendor matters, projects, meetings with homeowners, overseeing homeowner architectural improvement projects, and reporting to the board? Thank you, A.M., Torrance

Dear A.M.:

It is not illegal to pay an officer to work for the HOA, unless the governing documents specifically ban officers from being paid (you should check). Although paying an officer is not illegal, it is a horribly bad idea. Paying an association member to do association work creates all kinds of conflicts of interest and other complications. Worse yet, that officer who is being paid is unprotected by the volunteer immunity normally afforded directors under the Business Judgment Rule and the immunity of Civil Code Section 5800.

T.Z., L.F. and A.M.: Encourage your associations to hire the best available management and avoid taking advantage of volunteer willingness to manage the HOA for free. 

Sincerely, Kelly

 Written by Kelly G. Richardson

Kelly G. Richardson Esq., CCAL, is a Fellow of the College of Community Association Lawyers and a Partner of Richardson | Ober | DeNichilo LLP, a California law firm known for community association advice. Submit questions to [email protected]. Past columns at www.hoahomefront.com. All rights reserved®.