Jim Porter: HOA charges to owners legal?
October 9, 2014
Lots of folks in our area live in subdivisions managed by homeowner associations or management companies, usually with recorded CC&Rs and architectural guidelines.
Almost all subdivisions are governed by the Davis-Stirling Common Interest Development Act in the Civil Code. By the way, the "Davis" in the name is former (recalled) Governor Gray Davis.
Although some HOAs don't know it, the Davis-Stirling Act changed a couple of years ago and is now found in a new section of the Civil Code starting at Section 4000. Today's column looks at billing issues encountered by HOAs.
HOMEOWNER VS. HOA
Fred Fowler filed a class action on behalf of himself and a class of home buyers and sellers against M & C, the management company of Diablo Grande, a subdivision in Patterson in the Sacramento Valley south of Modesto.
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My only experience with Patterson was when I represented a friend who was arrested after streaking the Patterson Rodeo.
That was a long time ago when streaking was in vogue. It's hard to explain to my daughters (or anyone) how streaking was once popular.
In conjunction with his purchase of a home in Diablo Grande, Fowler was charged a "Transfer Fee" of $125 and a "Foreclosure Transfer Fee" of $100, both imposed by M & C. These fees were essentially the costs for processing paperwork, filing and updating HOA records and researching a prior foreclosure of the Diablo Grande home Fowler was purchasing.
Fowler claimed collection of the fees was illegal under California law.
This is an important case for HOAs, and the Court of Appeal got it right. In sum, there are two types of transfer fees, which the Court clearly understood and carefully distinguished.
A somewhat recent phenomenon in the subdivision world is to impose a private real estate transfer fee, for example one-half of one percent of the sales price, on sales of lots and homes in a subdivision, where the money goes to a third party such as a charitable nonprofit or a land trust.
Many of the subdivisions in our area have such transfer fees, most through documents I prepared. (The law recently changed on these transfer fees, so beware.)
As of January 1, 2008, in an effort to make sure buyers of lots and homes in subdivisions know about these transfer fees, the California Legislature required that there be a separate recorded document captioned "Payment of Transfer Fee Required" that specifies the fee and obligation to pay.
To be effective, any new transfer fee imposed by a recorded Transfer Fee Covenant must record a separate notice "Payment of Transfer Fee Required." Section 1098 of the Civil Code governs formal transfer fees.
Fred Fowler claimed that because the so-called Transfer Fee of $125 and the Foreclosure Transfer Fee of $100 were not preceded with a recorded notice "Payment of Transfer Fee Required," they were unlawful and uncollectable. Fowler was suing for lots of owners so the stakes for the Association and other associations throughout the state were high.
COLLECTION OF ASSOCIATION COSTS
The other type of fees, separate from the formal Transfer Fee described above, are the normal fees and dues charged by an association or its management company for the costs of the association's doing business.
The Davis-Stirling Act allows associations to collect different fees from owners totally unrelated to the formal Transfer Fee. (Civil Code 5600; formerly Sections 1366 (a) and 1366.1.)
The Court of Appeal in Fowler v. M & C Association Management concluded that a formal "Transfer Fee," where a small percentage of the sales prices is paid on lot or home sales, requires the formal recorded notice "Payment of Transfer Fee Required;" however, M & C's $125 and $100 fees for processing the purchase by Fowler of a home in Diablo Grande were a Davis-Stirling cost of managing the association and did not require the special recorded notice.
Associations may charge fees to their members as long as the fees do not exceed the association's costs. M & C is entitled to charge for handling the transfer of ownership by billing the association, which is a "cost" to the association. That's perfectly legal.
Advice to associations and their management companies: do not call fees and dues to owners "transfer fees" — to avoid confusion with true Section 1098 Transfer Fees.
Jim Porter is an attorney with Porter Simon licensed in California and Nevada, with offices in Truckee, Tahoe City and Reno. Jim's practice areas include: real estate, development, construction, business, HOAs, contracts, personal injury, mediation and other transactional matters. He may be reached at firstname.lastname@example.org or http://www.portersimon.com.