Tough Decisions: When to Consider Terminating the HOA

There are many reasons to consider the deconversion/termination of a homeowners association. Buildings require more costly maintenance and repairs as they age. Owners become increasingly disengaged from their own associations. The owners who do volunteer become overwhelmed with mounting responsibilities as board members. The state enacts more laws at a speed that HOAs are unable to keep up with. And in other more catastrophic cases, such as the recent spate of wildfires, HOAs are forced to question whether it is worthwhile to rebuild the development. It is no wonder many condominium owners are now asking,

The short answer is yes, but only if state and local laws, the lenders of the property, and all the members of the HOA consent to it.

STATE AND LOCAL LAWS – The first and probably most important consideration is whether the local jurisdiction (e.g., state, county, city) allows such a dissolution of the HOA in question. If local laws have established extensive rules around conversion of condominiums, as in San Francisco, the same jurisdiction likely discourages the deconversion of the condominiums. Governmental approval may not be readily granted in the case of multi-unit buildings and subdivisions that were approved based on the property becoming an HOA in the first place.

Current state law also promotes HOAs and expressly discourages terminations. Under the Davis-Stirling Act, the state legislature states that “[i]f declarations terminate prematurely, common interest developments may deteriorate, and the housing supply of affordable units could be impacted adversely.” (Civ. Code § 4265(a)). This statement establishes a clear state policy in favor of preserving HOAs, not terminating them. The Davis-Stirling Act also provides procedures for extending the declaration, even where the declaration has a termination date, or where the declaration does not provide a mechanism for extending the termination date. (Civ. Code § 4265(a)-(b)). Unlike other states that are currently enacting legislation to allow HOA termination, California has a well-established policy in favor of HOAs under the Davis-Stirling Act.

LENDERS – In addition to state and local laws, lenders with a security interest in the development must approve the dissolution. A dissolution changes the nature of a lender’s security assets, and lenders may consider this change an automatic default or a trigger for a balloon payment. In the event of a dissolution, each owner in the association must be prepared for the consequences under their respective loan agreements.

THE OWNERS – The HOA must consider the requirements for dissolution under its own governing documents. In general, the members must approve the termination. (Corp. Code §§ 5034, 8610(a)). If an association maintains five or

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Tough Decisions Continued from page 15 more condominiums, apartments, or lots, then 100 percent of the members must approve of dissolution. (Corp. Code § 8724; Bus. & Prof. Code § 11004.5). Governing documents also often require the approval of local government entities and lenders to terminate an HOA.

If an HOA has been the subject of an order for relief in bankruptcy, or if it has no members, or if it has disposed of all its assets and has not conducted activity for the five years preceding the dissolution, the board can elect to dissolve. (Corp. Code § 8610(b)). Note that if the number of directors in office is less than a quorum, the association may need the unanimous consent of the directors. (Corp. Code § 8610(c)). The board of directors must also approve any termination of assets pursuant to Corporations Code section 7911(a)(1).

The Davis-Stirling Act does recognize limited circumstances that would allow an owner of a separate interest in a condominium project to maintain a partition by sale action, to force a sale of the entire project: (1) More than three years before the filing of the action, the condominium project was damaged or destroyed, so that a material part was rendered unfit for its prior use, and the condominium project has not been rebuilt or repaired substantially to its state prior to the damage or destruction; or (2) Three-fourths or more of the project is destroyed or substantially damaged and owners of separate interests holding in the aggregate more than a 50-percent interest in the common area oppose repair or restoration of the project; or (3) The project has been in existence more than 50 years, is obsolete and uneconomic, and owners of separate interests holding in the aggregate more than a 50-percent interest in the common area oppose repair or restoration of the project. (Civ. Code § 4610).

On October 17, 2022, Governor Newsom announced that the

2023. This timeline will affect those community associations relying on Civil Code § 5450’s State of Emergency “unsafe or impossible” exemption to hold virtual (Zoom) meetings without providing a physical meeting location. Associations will need to prepare for conducting inperson meetings again and following the requirements of Civil Code § 4090.

The first step in termination is seeking approval from the board, HOA members, government entities, and lenders. Once there is a resolution or plan to dissolve, the HOA must provide notice to the IRS by filing Form 966, while keeping in mind any tax consequences that may apply.

The HOA must then find an entity to take over association responsibilities, such as maintenance and repair of common areas. In some cases, local government entities may be willing to take over these obligations.

The HOA will also need to sell all corporate assets. The board of directors must approve any termination of assets, though there need not be a vote by members to do so. (Corp. Code §§ 7911(a)(1), 8710(g)).

Conversely, if the HOA has any debts or liabilities, they must be paid or adequately assumed in good faith by either someone financially responsible or the U.S. government. (Corp. Code §§ 8713–8714). All known HOA creditors and claimants must receive written notice of the dissolution, giving them an opportunity to send claims to the HOA for at least 120 days after the notice becomes effective. (Corp. Code § 8618).

Notably, a receiver may be able to assist in the dissolution process and management of HOA affairs. The court, with the HOA’s approval, can appoint a receiver if the court believes a receiver is in the best interests of the HOA and its members. (Code Civ. Proc. §§ 566–567; Cal. Corp. Code § 8513).

Upon termination, each owner should continue to own their respective unit as a separate parcel. However, common areas present the biggest challenge. In an HOA, the HOA itself owns the common area, and use of the common area is typically shared equally by the owners. (Civ. Code § 4500). The HOA retains the right to reasonably control the common area and is typically responsible for its maintenance and repair. After termination, the owners need to decide who will own the (former) common area.

Tinnelly Law Group is devoted entirely to the unique legal landscape that HOAs and their Boards of Directors face. Virtually all of our efforts are directed toward the representation of HOAs. Our firm prides itself on being sensitive to the interests of HOAs and being able to craft pragmatic, sensible and effective solutions to their problems.

Our firm believes there is no substitute for expertise. We have been representing HOAs exclusively since our founding in 1989. Our firm has developed a special expertise in the areas most important to Boards of Directors in their efforts to manage the affairs of their HOA: general counsel, governing document interpretation and enforcement, assessment recovery, alternative dispute resolution (ADR) and litigation. We also dedicate a substantial amount of time and resource to publishing educational whitepapers, blog posts and newsletters addressing trends in HOA law and popular issues encountered by our clients and their management.

We are constantly looking for ways to expand upon the value we add for our clients. One of our websites, FindHOALaw. com, is a comprehensive library of HOA law and legal information. Its thousands of pages of content and easy-to-use interface provides our clients and their management with a powerful tool for learning about the unique body of law governing HOAs in California.

We understand the importance of responsive and accessible attorneys and staff. Our technology and office policies ensure open and immediate lines of communication with our clients and their management. Our firm understands that cost-efficiency should be a central tenet of every professional services firm. We have made significant investments in cutting edge, cloud-based technology to improve our efficiency and to provide significant cost savings for our clients. This technology drastically improves the efficiency with which we access, manage, store and secure our clients’ files and information, while expanding the ability of our clients to communicate with our attorneys. The result is more effective handling of client matters at a reduced expense to our clients.

Our firm believes that excellence requires a commitment to continued improvement—both in the way we service our clients’ needs and in our knowledge of the changing laws which relate to the representation of HOAs. We pride ourselves on being sensitive to our clients’ interests and on being able to craft sensible and effective solutions to their problems. The trust we have earned has resulted in client relationships that span decades.

Tough Decisions Continued from page 16 If practical, the common areas should be divided up equitably among the owners and subsumed into their respective separate parcels of land (e.g., common area decks or parking spaces could be subsumed into the separate parcels). If it is not practical to equitably divide the common area among the owners, another solution is to record cross-easements, or reciprocal easements, in favor of and against each owner’s property. This would allow owners to continue using the property — for example, to access shared roads or maintain shared utility systems. Yet another option is to sell the common area to a third-party investor, who would then grant easement rights for each of the owners to use or access the property.

But even post-termination, owners face the same issues as when the property was HOA common area. With cross-easements, owners will still face issues regarding use restrictions, maintenance/ repair obligations, cost sharing, access rights, and insurance/indemnification of the property. In an HOA, owners at least have the benefit of state laws and their governing documents to establish their respective rights and responsibilities regarding the shared area. There are also delineated procedures for addressing disputes between HOA members involving maintenance, use, or access to a shared area. By contrast, when owners are not in an HOA, there is less certainty in how disputes over crosseasements will be resolved and no clear procedure for resolving such disputes. The problem with common areas in a post-termination situation may discourage owners from terminating their HOA in the first place.

In sum, there are both risks and benefits to termination of an HOA. But before considering a termination, an HOA or its members must determine whether it is even legally possible, whether it is feasible based on lender approval, and whether it is practical or valuable for all owners based on the physical configuration of the development.

A. Jeanne Grove, Esq., managing partner and co-chair of the Real Estate Practice Group at KDV Law, practices real estate litigation, including HOA disputes. She also regularly counsels HOA’s on their day-today operations and compliance matters. Ms. Grove is also a California licensed real estate broker.

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Hughes Gill Cochrane Tinetti, PC (HGCT) provides effective, affordable legal representation to community associations throughout Northern California. It’s all they do. And they do it with experience and insight, creating smart, strategic solutions that meet the complex and varied needs of common interest developments.

They handle both general representation and litigation matters for condominium projects, planned developments, and commercial common interest developments of all sizes and are experts in the unique issues facing senior housing communities, co-ops, timeshares, urban in-fill projects, and high-rise developments.

Hundreds of homeowner associations and community association managers trust HGCT to expertly handle their legal needs. Whatever the project, they bring a collaborative, friendly approach their clients find refreshing and rewarding.

HGCT attorneys have extensive experience in all facets of common interest development law and litigation. They’ve developed a balanced practice capable of serving the complete legal needs of community associations.

HGCT provides comprehensive general legal services for community associations and are experienced in every aspect of operations, governance, maintenance, and financing. Their attorneys are fully conversant with all issues related to California’s DavisStirling Act, governing documents, statutory requirements, and best practices.

Maximizing recovery is the key to a successful construction defect claim. They pursue every possibility, discover every problem, and fight to obtain every dollar to which their clients are entitled. And they don’t stop there – maximizing recovery is only the beginning. They offer extensive post-recovery services which maximize the economic benefit of the recovery. They are there from start to finish, every step of the way, to ensure a complete, cohesive and comprehensive handling of every construction defect and reconstruction scenario.

Headquartered in Walnut Creek, HGCT is a California law firm, with Bay Area roots, and strong local relationships. They focus exclusively on clients in the greater Northern California area and each of their attorneys is a recognized expert in community association law. They have more than a dozen attorneys who combine for more than 250 years of collective practice experience representing this specialized area. Their attorneys regularly serve as featured speakers at industry educational programs at the local, state and national level and author articles and reference materials to assist community associations in meeting their extensive and complex legal obligations.

Whether you’re a board member, community association manager, or commercial property owner, HGCT is the only law firm you need.

The Real Estate Practice Group at Kaufman, Dolowich, Voluck, LLP (KDV Law) handles transactions, consulting and litigation on behalf of clients across the nation. Our full spectrum of services allows clients to rely on one law firm for all of their real estate needs. We take a transaction through all stages, including contract negotiations, contract drafting, due diligence, and complex hurdles such as zoning, contamination, land use and taxation matters. When disputes arise, we work to achieve equitable, cost-effective solutions that meet our clients’ goals.

A. Jeanne Grove, Co-Chair of the Real Estate Practice Group and Managing Partner of the Sonoma office has nearly two decades of experience litigating and resolving HOA disputes. Most recently, Ms. Grove was featured as an HOA legal expert in the Daily 360 Journal and other news media outlets to address the Surfside tragedy and its impact on HOAs nationwide. She has also been at the forefront of discussions regarding California’s newest laws, SB-9 and SB-10, which are poised to dramatically expand development of multi-unit properties across the state.

Ms. Grove’s practice includes real estate and business litigation, including HOA and co-ownership issues, purchase/sale disputes and nondisclosure claims, and boundary, title, development, and construction matters. This full spectrum of real estate legal experience serves HOAs well, as they face a myriad of different real estate issues in the governance of their properties and their members. Based on her deep litigation experience, Ms. Grove regularly counsels HOAs on how to avoid conflicts, by managing their day-to-day operations and compliance matters. The Real Estate Practice Group co-chaired by Ms. Grove also offers 40+ years of experience representing developers and HOAs with condominium conversions, subdivision projects, and CC&Rs.

Ms. Grove and KDV Law have been prominent leaders of diversity in the legal profession. Ms. Grove was awarded a California State Bar Real Property Section Morning Star Award for excellence in real estate law in 2013, and in 2017, she received the Minority Bar Coalition Unity Award for advancing the cause of diversity in the legal community at-large. KDV Law achieved Mansfield Rule 5.0 certification in 2022, one of only 160 firms nationwide to achieve this status, representing the firm’s ongoing success with diversity and inclusion initiatives.

Ms. Grove and the KDV Law team apply their diverse backgrounds to reach creative and effective solutions based on the unique circumstances of each of their clients.

A. Jeanne Grove, Esq. Co-Chair of the Real Estate Practice Group and Managing Partner of the Sonoma office