October 4, 2012

Housing Committee
Legislative Committee

Issue:
Should C.A.R. sponsor legislation to allow an HOA to require tenants renting units in a CID to pay delinquent assessments owed to the HOA by the unit owner, authorizing such tenants to deduct those payments from rent under the following conditions?

1. Assessment delinquencies subject to this process must have occurred after January 1, 2014.
2. To be effective, this remedy shall be expressly included in any rental agreement executed on or after January 1, 2014.

Options:
1.  Sponsor legislation.
2.  Sponsor legislation to create a different remedy for collecting delinquent HOA fees.
3.  Recommend to the 2013 Housing-Ownership Committee that a new Working Group be created to further examine this issue in light of the Legal Q & A (attached).
4.  Take no action.
5.  Other

Status/Summary:
The problem of delinquent HOA assessments is rampant throughout CIDs in California specifically, and the country generally. HOAs are facing a daunting fiscal burden of providing the required services in the face of diminishing operating revenues. The Housing Committee's Delinquent HOA Assessments Working Group identified a problem some owners who rent their unit are creating for HOAs: they do not pay the HOA fees from the rent they collect. The Working Group requests that the Housing Committee approve its recommendation that C.A.R. sponsor legislation in 2013 directed at this growing challenge faced by HOAs.

Discussion

At least one local jurisdiction in California (San Diego) has created a process that, in instances of failure of a CID unit owner to pay required HOA assessments, a tenant of the unit is provided a notice in writing by the management of the HOA that he/she is required to pay the landlord's (unit owner's) late assessments and has the right to deduct that amount from the rent being paid to the unit owner. This authority does not exist in state law, but is created by virtue of language authorizing such action by the tenant that is included in the lease/rental agreement with the unit owner, as required by a local ordinance. HOAs using this approach require or persuade unit owners to utilize standardized leases that contain this language.

The "trigger" for such a payment process (if an appropriate lease is in place) is an assessment delinquency of the unit owner of more than two months, followed by a written demand by the HOA. The HOA contacts the tenant in writing and states that pursuant to current law and the provisions in his/her rental agreement, the unit owner and tenant are now jointly responsible for the delinquent assessments owed to the HOA. Once the tenant receives this notice, he/she has 15 days to pay directly to the HOA, and deduct from rental payments to the unit owner, an amount equal to the delinquent assessments up to the maximum amount of the monthly rent. Pursuant to provisions of the lease or rental agreement that contains the applicable authority for such action, the tenant is thus legally relieved from having to pay that amount to the landlord. Once all delinquent assessments are paid, the tenant may be required to continue to pay the normal monthly assessment directly to the HOA, deducting this amount from the rent paid to the unit owner, until the landlord resumes paying assessments.

The San Diego model allows the demand for a diversion of rents by the tenant to be made on 15 days written notice, after the HOA has experienced two months of delinquent fees by the unit owner. This model is unclear whether the delinquencies must occur after the tenancy is created or may include delinquencies that predate creation of the tenancy.

Is 15 days a reasonable and workable time period for such notice from the HOA to the tenant?

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In 2011, C.A.R. successfully sponsored enactment of SB 150 (Correa) (Chapter 62, 2011 Statutes). This legislation ensured that individual owners of a unit in a CID have the right to rent their unit if that ability was not prohibited when they purchased the unit. This right preempts any subsequent HOA Bylaw changes that restrict the right to rent. The proposed legislation from the Working Group would effectively allow the HOA to seize the unit owner's rental receipts to satisfy the delinquencies and associated legal and collection costs by going to the tenant on 15 days' notice.

Is this new remedy proposed by the Working Group consistent with the spirit and intent of C.A.R.'s SB 150?

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Civil Code Section 1367.4 contains elaborate restrictions on the ability of an HOA to collect delinquent HOA fees, or foreclose on a unit owner's interest for failure to pay the assessments owed to the HOA. The rule provides for small claims court enforcement and specifically requires that the delinquencies must exceed $1800 before a foreclosure action can be commenced. The statute also provides for dispute resolution procedures and allows a lien to be recorded against the unit for unpaid fees.

Is the proposed statute consistent with the spirit of existing law, or even necessary given the remedies that exist under current law?

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Under existing law, the unit renter's relationship to the CID is of a contractual nature based upon his or her lease or rental agreement with the unit owner. A tenant is typically not personally liable for the unpaid delinquencies of the landlord, at least in the absence of a contractual agreement to the contrary. The proposed statute would make the landlord and the tenant jointly liable for the HOA assessment delinquencies. It seems likely that tenant groups would resist the imposition on the tenant of what is legally the landlord's obligation, even if the delinquency arose after the tenancy began.

Is it appropriate to make the tenant personally liable for the delinquent HOA fees?

Does a 15 day written demand provide sufficient due process to impose such liability? Should it be 30 days or even 60 days?

What if the tenant refuses to pay? Should the proposed statute also contain authority for the HOA to evict the non-paying tenant?

How would holdover tenants be treated if they were tenants prior to when the new law went into effect?

What impact will this proposed new law have on lender's enthusiasm for lending on the purchase of units in CIDs?

Will such a change in the law precipitate foreclosures because the owner cannot afford to make both the mortgage payments and HOA dues payments with the amount of rent dictated by the current housing market?

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Which option should C.A.R. pursue?  Should C.A.R. sponsor legislation to require tenants renting units in HOAs to pay delinquent assessments owed to the HOA by the unit owner and authorizing such tenants to deduct these payments from rent?