Whose Business Is It Anyway?

Perspectives On How HomeBased Businesses Affect HOAs

 By Angelique Madrigal

The pandemic has brought on many changes for homeowners associations, and managers are doing their best to understand what obligations the communities have now that working from home and homeschooling has become common practice. Recently, I received an email from an owner in a community I manage. She shared her concerns about her neighbor’s homeschooling their children and additional children from the residents. Her grievance was that the tutors and children’s parents were parking in front of her home, creating a nuisance for her. The community rules do state that guests of a resident’s home must first occupy the space in front of their property. Furthermore, she vocalized her concern over the HOA’s potential increased liability and the increase in wear and tear to the private gates, streets—and most importantly, security concerns. She also raised the issue of neighbors now running their home-based businesses despite the governing documents prohibiting commercial use. After informing the board of directors, we reached out to industry experts for guidance. Our goal was to address her concerns once we understood the law surrounding these topics. We understood that the pandemic brought on changes that would not allow us to legally uphold the enforcement of some of these restrictions. Two trusted industry friends, Mr. Brian Berce, President of Golden Alliance Insurance and Mr. Marc H. Goldsmith, Esq. with The Law Offices of Marc H. Goldsmith agreed to share their perspectives with us.  From Brian Berce… “Since the onset of COVID-19 we are seeing both liability and property rates increase. This is a result of increasing loss trends seen by the carriers. Some of this has to do with the increased time spent at home by owners, as well as many homeowners working or operating a business out of their homes. Let’s examine why additional time spent at home can create additional losses for master policy insurers. On the property side, additional time spent at home means cooking more meals, using the plumbing, etc. more often. Each interaction with appliances, plumbing and the kitchen creates another opportunity for something to go wrong that may create a fire or water claim. These increased opportunities lead to additional claims and additional payouts by the insurance carrier. Carriers must in turn pass that cost on to the consumer in rate increases. From the liability side, there are many people that would not otherwise be coming to the association. People are operating businesses out of their home now, such as daycares, hair salons, consulting, tax firms, and many others. Each of these businesses represents more foot traffic and more opportunities for someone to become injured and potentially pursue the deep pockets of the association. In turn, these increased claims will definitely result in additional premiums for the association. They could also result in the cancellation of the association’s insurance, which would harm the association. So, what can be done about this? How do we mitigate the issue? Can we punish the unit owners who had these additional claims or invited these business associates onto the property, incurring injury with filed claims? Unfortunately, there is not much that can be done that without opening the door to a greater problem. It seems unrealistic, if not illegal, to disallow people from working from home. Even, if we were able to create a list of businesses not allowed, this may be unenforceable or illegal based on current law. The last option would be to incorporate a policy or CC&R amendment that would financially make the unit owner responsible for the impact on the HOA Master Insurance premiums. Although I have seen this one time in CC&Rs, it would require an amendment. However, with so many variables involved, it would be hard to narrow down the exact cost increase attributable to one individual claim. We must realize that we are now in a different world since the beginning of COVID-19. This has resulted in much greater usage of homes by owners for both personal and business use and in more claims and higher insurance premium. Unfortunately, there is not too much that an association can do to mitigate this other than plan for higher premiums.”

 From Marc Goldsmith, Esq. … “Personally, I’ve had to address questions about permissible businesses operating in a condo association (CA) as both an HOA attorney as well as the president of my own condo association. How I approach these questions in both roles is very similar. Since the pandemic started, more condo residents are working from home, more children are being home

schooled, and some of these activities may put stress on associations and their budgets. Also, as your questions suggest, some CC&Rs, especially older ones, prohibit all commercial activities inside units or common areas, while newer CC&Rs are more likely to reflect current CA case law and only prohibit commercial activities that cause unreasonable external impacts. As mentioned, there are a number of CA cases that provide that restrictions in the governing documents are enforceable unless they are unreasonable. For that reason, a blanket prohibition against commercial activities—if enforced—would likely be unreasonable and unenforceable in many situations because many commercial activities have few or no unreasonable external impacts. For instance, there is no good reason why a screenwriter or painter should be prohibited from doing their business in their unit if they are not bothering anyone. On the other hand, some commercial activities could negatively impact other residents or the association as a whole. Such unreasonable external impacts can include the unreasonable frequency and/or extent of noises, smells, traffic, or perhaps even an unreasonable strain on common area facilities or resources. In addition to looking at the external impacts, CA law also looks at the nature of the business being conducted. For instance, some businesses are expressly protected by CA law, such as a family day care home. Meanwhile, other businesses may involve illegal activities (e.g., the manufacture of illegal drugs) and would be prohibited under both CA law and (very likely) the association’s governing documents. Before an association tries to prohibit a commercial activity because of its external impacts, it might try and determine with the resident if there are actions the resident could take to minimize these external impacts. For instance, an association might negotiate with a resident musician playing music in their unit, either with or without the help of a mediator, to require the resident to soundproof their unit. The association may also try and negotiate a requirement that the resident’s guests park on nearby public or private streets, so as not to overly burden common area parking. As for holding the resident financially responsible for excessive wear and tear on common area elements, that would be largely a matter of proof. If the HOA tries to recover the costs of repairing such wear and tear from a resident and the resident resists these efforts, the HOA will have the burden of proof to show that the resident’s guests were the cause of specific wear and tear. And that’s often not easy to prove.” Clearly insurance agencies and legal firms agree on this topic. While a board is still able to address some of the associated nuisances caused by more work and businesses in a community, there are limits on enforcement of governing documents that prohibit it as a whole. It is strongly recommended that any association facing similar situations seek guidance from experts. Managers and board members should educate themselves so that they can make the best possible decisions for their associations. The goal is always safety and harmonious living.

Angelique Madrigal is the Director of Business Development and Client Relations at Ross Morgan & Company, Inc., a full-service management company serving Southern California. She can be reached at angelique@rossmorganco.com.

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