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Arcade games in homeowner association clubhouse create nuisance

It's a breach of manager's duty to enter into a financial relationship with vendor that bypasses HOA coffers

Question: Our homeowner association manager allowed her friend to install arcade computer games in the clubhouse. The board of directors did not vote to allow this and has done nothing to stop it. The manager admitted that she has an arrangement with the owner of the games to pay her a portion of the profits. Homeowners are raising questions about insurance, security and liability, and they're complaining that the manager has turned our clubhouse into an arcade open to anyone. We already have problems with break-ins, and residents and owners fear we've now added an "attractive nuisance" that will bring in even more crime. The majority of board members are calling this a new "amenity." How do owners convince this non-responsive board to stop this?

Answer: Your development's amenities are documented in the common interest development's recorded governing documents, which function as restrictions on each owners' deed. If a computer game arcade is not among them, then it is not allowed. The owners can collectively agree to expand the inclusion and treatment of amenities in their governing documents, but legal procedures for doing so must be followed.

Owners need to understand that all amenities are also liabilities. However, certain aspects of your development may be worth the risk, provided that titleholders know, understand and accept those risks. They also have to vote to include the amenities along with the attendant risks and obtain appropriate insurance coverage.

In addition, the board and the management must have detailed security measures and oversight procedures in place.

Most insurance companies will help customers determine whether additional coverage is available or needed for such new additions.

The manager owes a duty to the association not to usurp a potential business opportunity. The gaming arcade and its "arrangement" with her equate to an opportunity that belongs to the association. It is a breach of the manager's duty, and probably her contract, to enter into a financial relationship with a vendor that bypasses the association's coffers.

Costs aside, the board's duty is to prevent such transactions and to perform adequate due diligence to the extent its investigation includes all possible avenues of liability that could be imposed on the association and its titleholders.

Titleholders have a duty to question this arrangement and to question whether the applicable insurance policies were reviewed, how the increase in utility usage is being paid and whether additional security measures were even considered.

These due diligence procedures, and more, should have been followed. And there should be a corresponding motion documented in meeting minutes that was seconded, voted on and carried. If the board has reason to believe that the manager is acting improperly, the board's minutes also should contain a reference to this inquiry and investigation.

Depending on the specifics of your covenants, conditions and restrictions, the owner of the arcade games also may be violating the association's restrictions and tax status by operating a for-profit business on common-use property. Again, all such possibilities and issues created by this situation must be thoroughly considered and deliberated on by the board at an open meeting.

It is very likely that the proper voting procedures were not conducted regarding this installation and that the proper steps were not taken to add this purported amenity to the covenants, conditions and restrictions of your association.

If that is the case, the actions of this owner and your manager may have invalidated the association's insurance coverage or, at least, caused an exclusion for this area and use.

Continuing to operate any aspect of the association in such a manner, and without releases and waivers from arcade users, is a huge potential for liability and risk to titleholders.

Owners convince a recalcitrant non-responsive board by banding together as a group. There are more owners than board directors. Take advantage of that: Protect your assets, be heard and improve the quality of your living environment.

Zachary Levine, a partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian JD, P.O. Box 10490, Marina del Rey, CA 90295 or noexit@mindspring.com.

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