BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
It has come to Broker Risk Management’s (“BRM’s”) attention that homeowners’ associations (“HOA”) and/or their management companies have not been providing all the information which is statutorily required to buyers. Brokers and agents have been inquiring as to how to handle that situation. Consider the following scenarios:
SCENARIO NO. 1: HOA is provided minutes from the homeowners’ association but it appears to the buyer’s agent that minutes are missing. The buyer’s agent asks the listing agent for the remaining minutes. The listing agent has reported that the HOA is not responding.
SCENARIO NO. 2: All the records have been requested from the HOA’s management company, the financial records are missing and the buyer is within days of closing the escrow.
SCENARIO NO. 3: It is clear that the HOA is not cooperating in providing all the records requested by the buyer. The seller is pressuring the buyer to remove the buyer’s contingencies, including issuing a Notice to Perform.
DISCUSSION:
California Civil Code §4525 requires that certain documents be provided by a seller to a buyer where a property is subject to a homeowners’ association (“HOA”). The documents required to be provided to a buyer include all governing documents, such as: covenants, conditions & restrictions; bylaws; articles of incorporation; and any operating rules. A seller is also required to provide a buyer with any financial disclosures relating to the HOA, including the most recent annual budget and a summary of the association’s reserve study, which details funds for major repairs.
The disclosure also requires the following: a statement of any regular and special assessments levied against the property; a statement of any outstanding debts or fines owed by the current owner; a statement disclosing any pending litigation against the HOA; and a summary of the HOA’s current insurance policies. For the specific property being sold, the seller must also provide any notices of violation on file with the HOA. The buyer should also receive board minutes from the previous 12 months.
Sellers rarely have this information and generally delegate the responsibility of obtaining these documents to the listing agent and/or the escrow company. It can be risky for a seller to attempt to provide such documents from those that seller received from when they bought the property, or even thereafter, since those documents are likely out of date; and seller risks potential liability for not fully complying with their disclosure obligations.
The listing agent and/or escrow company may request that information from the HOA or its management company. In many instances, the HOA and/or the management company do not timely respond or do not provide complete records. This creates a significant risk to the buyer. For example, the documents could indicate that the HOA is insolvent. The documents could also indicate that there are special assessments being considered which could severely impact on the buyer if the buyer is required to pay special assessments. There is a reason why the California Legislature requires that sellers provide this information to a buyer – the Legislature considers the information to be material for any buyer purchasing real property.
The buyer is placed in a significant dilemma if the documents are not timely delivered. It should be noted that the failure of an HOA to timely deliver records constitutes a breach of its fiduciary duty to the seller. If an HOA is not cooperating, a seller needs to contact the HOA as the HOA’s duties are owed to the seller, not to the agent or the buyer. If that is unsuccessful, the seller may wish to consider retaining counsel to force the HOA to comply.
If the HOA fails to provide information to the buyer, the buyer is placed in a position of having to make a decision as to whether the buyer wishes to take the risk of purchasing the property without the information. Should a buyer be placed in that situation, BRM has drafted the attached Advisory regarding missing homeowners’ association information. Agents representing sellers and buyers can use the attached Advisory in the event that the HOA and/or the seller fail to provide sufficient information.
PRACTICE TIPS:
- If an HOA is not providing information required by law, request that the seller demand compliance from the HOA.
- If the seller is pressuring the buyer to remove contingencies or close the escrow without receiving all HOA documents, recommend that the buyer consult with a qualified California real estate attorney about the risks and the buyer’s options.
- If the buyer chooses to move forward with the transaction without receiving all the HOA’s documents, use the attached form to ensure the buyer is aware of the risk and releases the parties of liability.
Attachment: Advisory and Release Regarding 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.