FACILITATING SALES WITHOUT LIABILITY
by Dana S. Marron, Esq.
Bay Area housing prices are making news around the nation. As temperatures and prices rise, sellers' expectations will be an all time high this summer. How can boards and managers help owners maximize values and facilitate sales without liability? The following list of do's and don'ts offers some tips to boards and managers trying to help sales without overstepping their boundaries and getting into the trouble zone.
Don't---Make Disclosures To Real Estate Agents and Buyers
Real estate agents and buyers frequently press managers and directors for information regarding assessments, litigation, number of rentals, often presenting official-looking forms which demand detailed information. Managers and directors have no duty to disclose any information to real estate agents or buyers. In a 1996 case, Kovich v Paseo Del Mar Homeowners' Assn., a court held that an association had no obligation to advise a prospective purchaser of construction defect litigation brought by the association against the developer. This holding is consistent with Civil Code section 1368, which directs associations' disclosure obligations to owners only. Managers and directors who nonetheless choose to make disclosures to buyers, real estate agents or lenders run the risk of liability based on disclosures that, under the litigation magnifying glass, might appear inaccurate, incomplete or distorted.
Having said that, how can managers and directors tell real estate agents "No," without jeopardizing sales and driving real estate agents and buyers out of the community? The board may consider adopting a policy which (a) clarifies that the association is limiting disclosures to what is required by them under the law, and (b) specifies the information which will be provided to the owner-seller upon request. Adopting a written policy ensures that disclosures will be handled uniformly and presents the board's position in a professional, respectful manner.
Do----Know The Law
In the context of real estate transactions, the association is required only to provide certain specific information and only to certain people---owners. Civil Code Section 1368 requires associations to provide the following information to owners:
- A copy of the governing documents (articles of incorporation, bylaws, declaration of covenants, conditions and restrictions, rules and written policies);
- A statement that age restrictive covenants (if any) can only be enforced in accordance with the Unruh Civil Rights Act;
- A copy of all documents distributed pursuant to Civil Code Section 1365 (which includes the pro forma budget and reserve study information and summary, a review of the financial statement, the statement describing the association's assessment collection policies, and a summary of certain of the association's insurance policies);
- A statement indicating the current amount of the association's regular and special assessments;
- A statement disclosing the assessments owed by the seller and any changes in the association's current regular and special assessments that have been approved by the board but are not yet payable; and Specified information relating to construction defects or to the association's repair plan for such defects, where this information has been distributed to members pursuant to Civil Code Section 1375 or 1375.1.
The above information must be provided to the owner within ten days of his or her request. Further under Civil Code Section 1368, the association may charge a fee for this service that may "not exceed the association's reasonable cost to prepare and reproduce the requested items."
Consider---Adopting A Policy Regarding Third Party Disclosures
Even though the law does not require associations to make disclosures to real estate agents, lenders or buyers, some boards may be willing to accept some risk associated with liability for misrepresentation, in exchange for the benefit of helping members sell their properties. If your board falls into this category, confer with the association's lawyer who can draft a narrow policy strictly limiting the information that may be disclosed to third parties. Once the board adopts a policy regarding third party disclosures, management can implement it, with less risk to the association than there would be in the absence of such restrictions. Bear in mind, however, that the safest course it to adopt a policy that absolutely prohibits third party disclosures.
Do---Welcome Real Estate Agents
Real estate agents are sales people; the better they know your product---your community---the better they can sell it. Invite a real estate agent to make a presentation at your next membership meeting to offer selling tips to members and insight about the real estate market in your neighborhood. Assemble helpful information about your community in a fact sheet or brochure including information about recreational facilities, age of the association, nearby transportation, shopping and school systems. Circulate this promotional material to real estate agencies in your neighborhood.
Do---Leave Litigation Disclosures To Your Lawyer
Litigation presents special disclosure issues. Communications between attorneys and their clients are shielded under a cloak of confidentiality that must be cautiously protected. In the case of community associations, only communications between the association's attorney and the board (acting as the association's voice) are protected. In addition, communications with the association's managing agent generally are protected. However, if communications between the association's attorney and the board are shared with a real estate agent, a lender, a homeowner, or anyone else outside the attorney-client relationship, the information loses its protective cloak. For example, in a deposition, a director would not be obligated to disclose that the association's attorney found some weaknesses in the association's case---unless the director removed the cloak of confidentiality by sharing this information with a homeowner. Once exposed to someone outside the attorney-client relationship, the information can be discovered or subpoenaed by opposing counsel. Inevitably, once some information is leaked, other information is exposed, some of which might be used against the association in its lawsuit.
So, how do boards keep owners apprised of the litigation without breaching confidentiality? Your lawyer can help the board build a disclosure file, containing non-confidential information, updated from time to time, that can be inspected by owners. Again, the board's duty to disclose does not extend to anyone but the owner, and access to the disclosure file should be limited to owners only. As an extra precaution, the board may prohibit members from photocopying the file, in order to prevent the possibility that the information will be disseminated in an incomplete or inaccurate manner. In addition, your lawyer can provide periodic updates to the members, to keep them informed, without jeopardizing the attorney-client "privilege" (confidentiality).
Your attorney also can help put real estate agents at ease. He or she may be willing to meet with a group of real estate agents to let them know what the case is about and what it is not about. Rather than let real estate agents' imaginations run wild, it often helps to provide them with concrete information about the lawsuit. However, in the case of associations in litigation, where general disclosure liability is complicated by attorney-client privilege, managers and directors may be better off letting their attorneys channel the information into the real estate market, rather than risk liability exposure.
Don't---Ignore Your Governing Documents
The law requires directors to enforce their governing documents, including maintenance and "use" restrictions (pets, parking, residential use, rentals, and so on). The policy behind many of these restrictions is preservation and enhancement of property values. Not only does the law require boards to enforce and comply with the governing documents, but there is also value, literally, in a well-maintained community, where members comply with the restrictions.
Failure to maintain, repair and enforce the governing documents undermines the board's credibility, deteriorates membership support and the attractiveness of your community. Reminding yourselves and your members that the governing documents help maximize property values makes it easier to enforce the documents in a reasonable manner and to encourage membership compliance.
When California courts issue rulings that send a message that boards and managers should not make any disclosures to real estate agents or buyers, and should make only limited disclosures to sellers, it can be hard for managers and boards to facilitate sales. The law, however, does not require that managers and directors shut out real estate agents and buyers. Instead, welcome agents and buyers into your community, promote your association and communicate clear policies regarding disclosure, that comply with legal requirements. If your association is in litigation, take away "fear of the unknown" by having your lawyer explain the lawsuit to real estate agents. And remember, just doing your job well----enforcing your restrictions, maintaining and repairing the property----goes a long way toward enhancing your community's marketability and minimizing liability.