BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
HANDLING HOMEOWNER ASSOCIATION DOCUMENTS
Broker Risk Management (“BRM”) has seen an increase in claims relating to the nondisclosure of homeowner association information and documents. The following provides tips regarding handling HOA documents.
Where there is an HOA, Civil Code §4525 requires a seller to provide a buyer with certain HOA documents including but not limited to: articles of incorporation, minutes from the prior 12 months of meetings, financial statements, balcony inspection reports and assessments. Statutorily, it is the seller’s responsibility to provide these documents to a buyer. However, in the real world it is generally the escrow company or listing agent that requests the documents from the HOA or HOA management company on behalf of the seller.
A common problem in obtaining HOA documents is ensuring that the documents being provided by the HOA are complete. A complete list of required documents is set forth on the CAR “Homeowner Association Request for Required Statutory Documents” (zipForms form HOA-RS). If a listing agent assumes the responsibility for obtaining those documents on behalf of a seller, the listing agent is also assuming the duty to verify that the documents being provided are complete. That listing agent should doublecheck the documents provided by the HOA for completeness against the HOA-RS form’s list. If the documents are incomplete, the seller (not the listing agent) should contact the HOA and request the missing documents. While the HOA has no duties to the new buyer nor to the real estate agents, the HOA has a statutory duty to the seller to comply with these requests. The HOA will have a duty to the new buyer, once the buyer becomes a property owner.
If the seller is on the HOA Board of Directors or actively participates in the HOA, the seller then has a heightened obligation to disclose any information the seller may have regarding the HOA. For example, if the seller attended a meeting where special assessments or when litigation was discussed, that seller has an obligation to disclose that information. If the seller is an officer of the HOA or on the Board of Directors, the seller may be placed in a precarious position given the seller’s obligations of confidentiality and fiduciary duties to the HOA. If this is an issue, the seller should be referred to a qualified California real estate attorney to consult regarding this conflict and resolution of the issue so that complete disclosures are provided to a buyer without breaching fiduciary duties the seller may owe to the HOA. (NOTE: For these reasons, many real estate licensees decline to become a director or officer of an HOA.)
A buyer’s agent also has a duty to verify that their buyer client is receiving all the HOA documents from the seller (See checklist on CAR Form HOA-RS). If there are missing documents, the buyer’s agent should request those documents from the listing agent.
While the buyer’s agent does not have a duty to read or understand and interpret the HOA documents (e.g., Covenants, Conditions and Restrictions or financial documents), the buyer’s agent has a duty to identify red flags which may be applicable to a buyer. For example, if the buyer has pets, the buyer’s agent should advise the buyer to investigate and review the HOA documents to ensure there are no prohibitions or restrictions on those pets. (If the buyer has an emotional support animal, the buyer should communicate with the HOA directly prior to the removal of contingencies, to confirm that the HOA is going to accept the animal.) Other issues a buyer may investigate include whether there are restrictions on rentals, restrictions on improvements, or other such issues. Are there special assessments being imposed? These red flags can lead to costly issues for any buyer.
If the HOA is in litigation or has been in litigation with any party, particularly with the developer of the project, the buyer’s agent should recommend that the buyer consult with qualified California legal counsel regarding the implications of that litigation on the buyer. For example, will that litigation lead to special assessments? Are there construction defects located at the property that will need to be remediated and could interfere with the quiet enjoyment of the purchased unit?
A good place to look for these potential red flag issues is in the minutes of the Board of Directors or of their various committees for the past 12 months, the reserve studies, and the list of defects, all of which are required by the law to be provided to buyers.
In summary, agents should pay close attention to HOA documents, ensuring their clients receive all statutorily required documents from the HOA. Listing agents should be cautious in assuming the seller’s obligation to provide all HOA documents to the buyer. Buyer’s agent should identify any particular red flags which may affect the buyer’s purchase of the property.
PRACTICE TIPS:
- Agents need to ensure a buyer is receiving all of the statutorily required HOA documents (See HOA-RS checklist).
- If listing agents undertake the obligation of ensuring that the buyer receives all of the HOA documents, the listing agent must compare the documents with the checklist to verify that all required documents are provided to the buyer. If any documents are not provided (i.e., the HOA does not prepare or keep such documents, or will not provide certain documents that they do possess), the seller needs to identify those documents for the buyer.
- Buyer’s agents should ensure the buyer is receiving all of the statutorily required documents.
- Buyer’s agents should identify any red flags affiliated with the HOA which may be specific to the buyer (i.e., pet restrictions or rental restrictions).
- Prior to entering into contract, or shortly thereafter, buyer’s agents should provide their buyer with a copy of the CAR Buyers Homeowners’ Association Advisory (zipForms form BHAA) which is a helpful guide to buyers when they are reviewing the HOA documents.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management LLP. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry but rather are intended to suggest good risk management practice