Questions Abound in a Seller’s Market
By Vivian X. Tran, Esq.
This article first appeared in the Fall 2021 Issue of The Communicator here.
Since the pandemic, followers of the real estate market will notice that the housing market is booming. There are not as many sellers as there are buyers, so the competition is through the roof. Many potential buyers are looking to buy their next homes within an HOA. In the Bay Area, even though many homebuyers waive all contingencies – against my advice as both an attorney and real estate agent – there are still a few conducting investigations (especially for townhomes or condos). Corresponding to the increase of competition to buy homes is an exponential increase in the number of questions from real estate agents and mortgage/escrow companies that are directed toward an HOA and its agents. What should the board of directors and the HOA’s manager be aware of? What should they do in certain situations?
The first thing to understand is that the HOA has no legal obligation to make disclosures to buyers of properties within the HOA or to other third parties. These third parties may be real estate agents, loan processors, escrow companies, or anyone else looking for information regarding the HOA who is not an HOA member. The price of the property, no matter how high, does not allow a third-party to compel information from the HOA or its manager.
The second thing to know is that even though the HOA has no legal obligation to make disclosures, its management company and even its board will be asked numerous times by third parties to provide further information regarding any pre-litigation matter or lawsuit the HOA is engaged in. The following are typical questions sent to me verbatim by managers:
Can the HOA or management provide a copy of the complaint? No, the third-party can locate or buy a copy of the complaint on the court’s website.
Can the HOA provide certain certifications or expert documentation? No, such things are confidential.
How much money is the HOA and/or management being sued for? This is confidential and/or the matter is still ongoing, so the amount is unknown. Would the anticipated or known damages and legal expenses be expected to exceed some percentage of the HOA’s reserve fund? This is confidential and/or the matter is still ongoing, so the amount of damages and legal expenses is unknown.
Can the HOA’s attorney provide an opinion that any award granted in the lawsuit will be covered under the HOA’s master insurance policy? No. As there is an ongoing lawsuit, the HOA’s general counsel does not know the amount the HOA’s insurance carrier will agree to and/or be responsible for covering.
When will the matter be resolved and will it be resolved in the HOA’s favor? No one knows, that is why the HOA is in litigation. Matters can be resolved before litigation, during litigation, right before trial, after trial, or never.
Sometimes these third parties will require that the answer to these questions come directly from the HOA’s general counsel and not the HOA’s manager. In either case, neither the HOA’s board nor its management or any of its agents should answer in any more detail than what is outlined here. It is actually best to have the HOA’s general counsel answer all of these questions whenever possible.
If the HOA’s general counsel is handling the matter, the board should ask them to prepare a general disclosure letter the HOA may use to present to any third parties requesting further information. In addition to not answering any of these questions, the disclosure letter should also not contain any predictions or conclusions. The vaguer the better, as the disclosure letter is meant to be an official tool to block further communication from third parties. If applicable, the disclosure letter will provide the appropriate contact information if the HOA’s insurance carrier picked up the claim and an adjuster and insurance defense counsel were assigned. If the HOA and its management need help navigating this scenario, they should direct all questions to its general counsel.
The third thing to know is that if a homeowner and/or third-party requests further information regarding any pre-litigation or lawsuit in order to refinance his/her home, and the pre-litigation or lawsuit is not resolved, no material or information should be disclosed beyond the fact that things are in progress and the HOA does not know how matters will be resolved. The general disclosure letter may be provided to the homeowner. Unfortunately, even though loan and refinance rates are at an all-time low, the HOA is not obligated to assist homeowners in refinancing – especially if the information being requested is privileged (i.e., confidential).
The fourth thing to know is that any questionnaire sent to the HOA or its management by a real estate agent should be forwarded to the HOA’s general counsel for analyzation. Oftentimes, these questionnaires are sent out if the home or unit sold is in litigation. The questionnaire should not be filled out and returned without the HOA’s general counsel’s input as any disclosures might create unwanted liabilities for the HOA. For example, the questionnaire could ask whether the unit involved in litigation has asbestos. The manager might disclose there is no asbestos in HOA common areas, believing it to be true. If it turns out to be true, no harm has been done. However, if asbestos is discovered, the manager and HOA are now in a precarious situation that could have been avoided entirely.
It is the dream of any manager and homeowner to have a problem-free HOA. Unfortunately, there are usually one or two problem owners with ongoing violations that may result in pre-litigation or litigation. Sometimes, fining the owners in those cases does not yield favorable results, so the HOA is required to offer alternative dispute resolution ("ADR") before filing a lawsuit. If the owner and HOA do not agree to settle matters before or in ADR, the HOA’s board will often elect to bring a lawsuit against the violating owner(s) to enforce its governing documents (e.g., Declaration of Covenants, Conditions and Restrictions, Bylaws, Rules & Regulations). Civil Code section 4935 requires that the board keep items related to member discipline confidential. Most importantly, the HOA and its management should not disclose anything relating to the HOA’s involvement in ADR or litigation, no matter how much pressure is exerted from third parties requesting information.
While evading questions from homeowners and third parties might seem frustrating, such action is necessary. Pre-litigation and the proceedings of a lawsuit do not guarantee any outcome (that is the whole reason there is pre-litigation and/or a lawsuit in the first place). The HOA and its management should know that homeowners and third parties will be very aggressive in trying to obtain further information. However, the best course of action would usually be to: direct the matter to the HOA’s general counsel; provide the disclosure letter; and indicate, in some fashion, that there is no further information at this time as the matter is ongoing or in the process of being resolved (descriptions will vary depending on each scenario). When real estate agents, lenders, or escrow companies, etc. remain persistent, simply have management reiterate the HOA will not be disclosing any information, has no obligation to do so, and all queries will be redirected to the HOA’s general counsel.
Vivian X. Tran, Esq. has a litigation background specializing in HOA, complex business, and real estate law. She has handled numerous insurance defense litigation cases dealing with contracts, fraud, negligence, breach of fiduciary duty, and title, among other things. She is no stranger to the interpretation and enforcement of governing documents, third-party vendor contracts, settlement negotiations, property remediation, and offering preventive litigation measures to community managers and boards of directors. [email protected]